BIM37955 - Wholly & exclusively: expenditure having an intrinsic duality of purpose: avoiding a conviction
Cost of defending against a charge of conspiring to defraud
The cost of avoiding a criminal conviction is not allowable. The
costs of defending a civil action are allowable only if incurred
wholly and exclusively for the purposes of the trade, profession or
vocation. A partnership incurring expenditure that results in a
benefit to a particular partner is not denied a deduction when such
benefit is merely incidental.
In the case of Spofforth & Prince v Golder [1945]
26TC310, a firm of two chartered accountants, claimed a deduction
for certain legal costs they had paid to successfully defend one of
the partners in court proceedings. The partner had been charged
with conspiracy to defraud the Revenue. The firm first sought legal
advice on receipt of a letter from the Solicitor of Inland Revenue
stating that he wished to take evidence from two of their
employees. When, however, a summons was issued against one of the
partners to appear before a Court of Summary Jurisdiction, the
firm’s solicitors were of the opinion that the partners
should be separately advised. This opinion was accepted and Counsel
having advised that the acquittal of the accused partner was vital
to the interests of the firm the summons was defended. Counsel
appeared at the hearing on behalf of the accused partner, and a
watching brief was held for the other partner by other Counsel. The
summons was dismissed.
On appeal to the Special Commissioners the accountants
contended that the whole of the costs incurred by them in
connection with the proceedings (or, in the alternative, the costs
incurred prior to the service of the summons, and the costs
incurred by the partner who was not involved in the proceedings)
were moneys wholly and exclusively laid out or expended for the
purpose of their profession. Accordingly, the sum expended (or, in
the alternative, a part thereof) was an allowable deduction in
computing their profits.
The Special Commissioners held that the legal costs incurred
were not an allowable deduction.
The High Court, affirming the decision of the Commissioners
on the main point, held that neither the costs of defending the
accused partner, nor the costs in respect of the legal advice and
assistance to the other partner were admissible deductions. But
that a deduction was allowable in respect of any legal costs
incurred by the firm up to the issue of the summons.
Wrottesley, J explained why no deduction was due for the
legal costs incurred after the issue of the summons. Up to the
issue of the summons it appeared that the firm’s solicitors
was acting for the appellants in the ordinary course of business,
and in circumstances in which the appellants could fairly say that
the purpose for which they gave the instructions and incurred the
resulting costs were their ordinary professional purposes. So the
expenditure to this date was allowable.
Mr. Prince was not the partnership, and the object and
purpose of the retainer by Mr. Prince of Messrs. Godden, Holme
& Ward was not the best interests of the partnership but the
best interests of Mr. Prince. If necessary at the expense of the
partnership. Moreover unless costs are authorised in advance to be
incurred by the partnership they cannot be said to be incurred by
it. These costs seemed to the judge to be comparable with the
charges which Mr. Prince doubtless incurs in order to reach the
firm’s office in the morning. They were private and so
disallowable.
For those who do not have ready access to tax case volumes,
the part of Wrottesley J’s judgement where he explains why
the expenditure was not allowable is set out below, 26TC starting
at the head of page 315:
I am driven, therefore, to this conclusion,
that in respect of the bill of costs for Mr. Spofforth’s
defence, even if it were strictly incurred by the firm, it is not
deductible. I would add that, on the facts disclosed by the Case
and the documents, I have great doubt as to the firm ever having
incurred this expenditure in the strict sense. The Case and the
documents appear to me to negative this: rather they point to Mr.
Spofforth having retained the firm’s solicitor to defend him,
and the bill, it will be seen, was sent in to him and in his
name.
But that leaves two other matters which are
not so readily disposed of. First, the costs incurred prior to the
service of the summons. From the letter written by Messrs. Rowe
& Maw on 31st December, 1940, it would appear that at and down
to this stage this firm was acting for the Appellants in the
ordinary course of business, and in circumstances in which the
Appellants can fairly say that the purpose for which they gave the
instructions and incurred the resulting costs were their ordinary
professional purposes. There had been a somewhat unusual demand by
a government department to interview servants of the firm, and in
that case it was an ordinary business precaution that the
firm’s solicitors should be called in to advise. If,
therefore, any appreciable sum of costs was incurred by the firm up
to this point, it is, in my view, properly to be deducted.
Finally comes the bill of costs in respect of
the advice and legal assistance to Mr. Prince – Mr,
Spofforth’s partner. I have endeavoured to fit into Lord
Davey’s formula this expenditure [see
BIM37300, Strong & Co of Romsey Ltd
v Woodifield].
But the facts so clearly set out at the end of
paragraph 3 of the Case are explicit and precise:
‘It was finally decided that Messrs. Rowe & Maw should defend Mr. Spofforth and that Mr. Prince should consult another firm, Messrs. Godden, Holme & Ward of 34 Old Jewry, E.C.2.’
From that moment the interests of Mr.
Spofforth were thought to be likely to diverge so widely from those
of Mr. Prince that each should be separately represented. It was no
doubt a wise decision.
As a result Mr. Prince was separately advised,
as the bill of costs shows, and in deciding to take that course,
both he and Mr. Spofforth were aiming, not at the making of profits
by the partnership, but at enabling Mr. Prince to protect his own
interests, so far as that could be done, by his having separate
legal advisers, when his partner stood his trial for a fraud
alleged to have been advised and abetted by that partner and their
clerks. As things fell out the advice given to Mr. Prince was of
considerable value to the partnership, and may have brought about
the ultimate result that Mr. Spofforth continued to defend the
case, with the result that it was dismissed. But Mr. Prince was not
the partnership, and the object and purpose of the retainer by Mr.
Prince of Messrs. Godden, Holme & Ward was not the best
interests of the partnership but the best interests of Mr. Prince,
if necessary at the expense of the partnership. Moreover, Mr.
Tucker for the Appellants agrees that unless the costs were
authorised in advance to be incurred by the partnership they cannot
be said to be incurred by it. These costs seem to me to be
comparable with the charges which Mr. Prince doubtless incurs in
order to reach the firm’s office in the morning.
