BIM37745 - Wholly & exclusively: duality of, or non-trade, purpose: remuneration, etc: premium to secure directors’ pension
Money laid out by directors for their own benefit not for the purposes of the company's trade
The expenditure incurred by a company in remunerating its
employees and directors (including the costs of ‘benefits in
kind’) is normally allowable. This is because the expenditure
is usually incurred wholly and exclusively for the purposes of the
trade and is not capital. But such is not always the case and you
need to consider the payer’s purpose.
In the case of Samuel Dracup & Sons Ltd v Dakin [1957]
37TC377 the company had introduced a pension scheme for employees
in 1950, and later extended it to a director who held only 1 share
in the company. Following his premature death in 1954 the company
made pension arrangements by means of endowment assurance policies
for its two remaining directors, who had been controlling directors
until 1953, when in anticipation of estate duty they transferred
part of their holdings to or on trusts for members of their
families.
The company claimed that £817 in respect of the premiums
on these policies should be deducted in computing its trading
profits as money wholly and exclusively expended for the purposes
of its business. The General Commissioners found that the premiums
were not a proper business expense and dismissed the appeal.
The High Court found that the Commissioners were amply
entitled to come to their conclusion. The expenditure was not
deductible. Harman J supported the view that the directors had laid
out the money to benefit themselves. There was no finding of fact
that the money was expended for the purposes of the company’s
trade. So the expenditure did not satisfy ICTA88/S74 (1)(a).
For those who do not have ready access to tax case volumes,
the part of Harman J’s judgement on which the above guidance
is based is set out below (37TC at page 381):
…I am asked to say that on the facts as set out in the Case, and I agree with Mr. Borneman [counsel for the company] that I must limit myself to those and to the proper inferences drawn from them; and, says he: Well, look at what the Commissioners accepted about these premiums. The first thing was that the Company was advised by its insurance broker that the pension scheme - that is a pension scheme they had for employees and for a working director having no interest in the Company - should be extended to include the two permanent directors. The reason that he gave for that advice was that the Company might at a future date, when those directors were ageing, be freed from the burden of paying them either remuneration or pensions out of its own resources. The Commissioners accepted that that advice was given. Whether or not it is good advice I am given no clue. They also accepted this evidence, that one of the permanent directors for whose benefit the policies were taken out said this:
‘…that the premature death of Mr. Dodd brought home to the Company…’
-Whom did he mean by ‘the Company’ there? He means its directors; that is to say, himself and his cousin –
‘…the desirability of making present provision for the families of the directors…’
-that is, their own families –
‘…in the event of the death of
either of them and the advantages to the Company of making that
provision through an approved superannuation Scheme’.
If you could make the provision and set it off
against the profits of the Company, of course it was an advantage.
Then it goes on:
‘…that the pension scheme
generally was an inducement to employees to remain in the employ of
the Company, and that it was also in the interest of the Company to
retain the services of the directors’
-that is to say, the witness and his cousin.
In other words, he gave himself and his cousin a pat on the back
and said what good directors they were.
The Commissioners appear to have agreed that
they probably were very good directors. But there is no suggestion
anywhere in the Case Stated, or in the evidence which was given to
the Commissioners, that the reason for taking, out these policies,
was because otherwise the directors would resign and leave the
business of the Company in the lurch. There is not any suggestion
that either of them threatened to leave. The only suggestion is
that it occurred to them that if they could have the insurance
policies on their own behalf which did not cost them anything, it
would be very nice for them; I dare say it would; money paid out by
the Company which they controlled. Under those circumstances it
passes my comprehension that business men who have to review those
activities are not entitled to say this is not a proper business
expense; in other words. You were laying out this money for your
own advantage and not for that of the Company, or, at any rate,
your own advantage came into it. If the Commissioners took that
view, it seems that they were amply entitled to do so and, even if
I did not agree with it, which I do, I should be quite powerless to
review it here. In consequence, I shall dismiss this
appeal.
