BIM37715 - Wholly & exclusively: duality of, or non-trade: remuneration, etc: paid to daughter
'Excessive' remuneration paid for a non-trade purpose is not allowable
In the case of Copeman v William Flood & Sons, Ltd [1940]
24TC53 the company was a private company formed in March, 1937, to
take over the business carried on by a pig dealer; the vendor, his
wife, two sons and daughter were the directors and sole
shareholders. The daughter, who was in the employment of the
company during the whole of the year ended 30th April, 1938, was
appointed a director in January, 1938. She was then 17 years of
age, and her duties consisted in answering telephone enquiries. The
sum of £2,600 in respect of remuneration for her services for
the period January - April, 1938, was charged in the company's
accounts; of this amount she drew £70 and the balance remained
at her disposal in a current account with the company. Her brother,
aged 23 years, received as remuneration for the year to April,
1938, the sum of £2,600 of which he drew £277 and the
balance was left in a similar current account; his duties mainly
consisted of calling on farmers in order to purchase pigs.
On appeal by the company, the Crown contended that it was
open to the Commissioners to consider whether the sums so charged
in the accounts as remuneration were in fact wholly and exclusively
laid out for the purposes of the company's trade, and that, having
regard to the age and duties of the son and daughter, the sums in
question could not be so regarded. The General Commissioners
decided that they could not interfere with the company's
prerogative to pay such sums as remuneration to its directors as it
thought fit.
The High Court held, that although the sums were paid to the
directors as remuneration, they were not for that reason
necessarily wholly and exclusively laid out for the purposes of the
company's trade; and the case was accordingly remitted to the
Commissioners to determine whether the sums in question, or what
proportion of them, were in fact so expended.
Lawrence J explained that whilst the Commissioners could not
interfere with the directors’ commercial judgement, that was
not the test. The test was how much of the remuneration was
incurred wholly and exclusively for the purposes of the
company’s trade. The case was remitted to the Commissioners
to find as a fact whether the sums in question were wholly and
exclusively laid out for the purpose of the company's trade, and if
they were not, to find how much of such sums was wholly and
exclusively laid out for the purposes of the company's trade.
As indicated in
BIM37707, a Commissioners’ finding
as to the amount of remuneration that was wholly and exclusively
for the purposes of the trade is conclusive on the facts of a
particular case. The Commissioners may only be overturned where
they have reached a conclusion that is unsupported by the
established facts. Most cases of ‘excessive’
remuneration are determined on their particular facts. You should
accept a deduction for remuneration that is commensurate with the
duties undertaken and at the rate payable on an arm’s length
basis by comparable employers.
For those who do not have ready access to tax case volumes,
the part of Lawrence J’s judgement on which the above
guidance is based is set out below, 24TC at page 56:
…I think it is perfectly true that the Commissioners cannot interfere with the prerogative of the Company to pay to its directors whatever it thinks fit, but they can find in a proper case that sums so paid are not wholly and exclusively laid out for the purposes of the trade, and it is their duty to direct their minds to that question and to that question alone. The only tribunal that can interfere with a company's prerogative to pay such sums as it chooses to the directors is the High Court in an appropriate case, but that has nothing to do with the Commissioners - the Commissioners have nothing to do with the internal economy of the company as a company; they have solely got to see whether in making up proper Income Tax accounts the sums which are to be deducted are sums which are permitted by the Income Tax Acts. It may very well be that there are sums which are paid to the directors as remuneration for their services in accordance with the articles of association and in accordance with a resolution of the company, but it does not necessarily follow in the least that they are sums which are wholly and exclusively laid out for the purposes of the trade.
The case must therefore be remitted to the Commissioners to find as a fact whether the sums in question were wholly and exclusively laid out for the purpose of the Company's trade, and if they were not, to find how much of such sums was wholly and exclusively laid out for the purposes of the Company's trade.
