BIM37960 - Wholly & exclusively: expenditure having an intrinsic duality of purpose: fines, penalties and damages
Damages for breach of contract
Civil damages are generally allowable. But where the expenditure
in fact serves a dual purpose it is disallowed.
The case of Knight v Parry [1972] 48TC580, is described in
detail at
BIM38545.
Parry was employed as an assistant solicitor, and made an
agreement with one of his principal’s clients that, upon
Parry leaving his employment and setting up in practice on his own,
the client would instruct Parry as his solicitor. This led to the
principal alleging that Parry had solicited the client and had
thereby committed unprofessional conduct, and the principal
reported Parry to the Law Society and requested that Parry should
be struck off the roll. The Law Society, on their first look at the
matter, took the view that there was a prima facie case, but before
proceeding to consider the matter themselves they suggested that
the principal should bring a civil action against Parry, which he
did. Parry defended that action, and in the result succeeded in
satisfying the judge that he had not solicited the client. But the
judge found that in making the agreement Parry had in fact
committed a breach of his duty of good faith under his contract of
employment. The judge awarded the principal a sum of damages and
costs. The point at issue was whether Parry was entitled to deduct
both the costs he was ordered to pay and his own costs.
When the principal again asked the Law Society to proceed
with his complaint of unprofessional conduct, the Law Society took
the view that their prima facie impression was dispelled, and they
declined to take any proceedings against Parry for unprofessional
conduct. There was no finding against Parry of unprofessional
conduct. On the contrary, the complaint was not, in the result,
entertained. Goff J said that the Commissioners had misdirected
themselves for two reasons:
- The taxpayer’s purpose of protecting himself professionally was not a purpose wholly and exclusively referable to the carrying on of his practice as a solicitor, but for the purpose of seeing that he was not precluded from doing so.
- If the taxpayer had admitted liability in breach of contract and offered to pay damages or had paid a sum of money into court there would then have been only the one purpose; but the taxpayer did nothing of the kind. Therefore there were the two purposes, and so the Commissioners’ decision must be wrong on the grounds of duality of purpose.
So a solicitor defending themself against an action, which, if
they lost, would preclude them from practising as a solicitor, has
an automatic non-professional reason and the expenditure is
disallowable.
For those who do not have ready access to tax case volumes,
the part of Goff J’s judgement where he explains why the
expenditure was not allowable is set out below, 48TC585C to
585F:
…it seems clear to me that the
Commissioners must have misdirected themselves as a matter of law
in reaching the conclusion that they did, and I say that for two
reasons. The first is that, on the authority of Spofforth &
Prince v Golder [26TC310 see
BIM37955]
and Norman v Golder [26TC293 see
BIM37940],
even the purpose of protecting himself
professionally was not a purpose wholly and exclusively referable
to the carrying on of his practice as a solicitor, but for the
purpose of seeing that he was not precluded from doing so. In the
Spofforth & Prince case costs incurred by a chartered
accountant and his partners in defending him against a charge of
fraud, and in Norman’s case medical expenses incurred in
restoring the taxpayer to health, were held not to be deductible
for that very reason; and I observe that those cases were not cited
to the Commissioners.
However, even if that were wrong, the second
purpose, in my judgment, clearly takes the case out of the Statute.
If the Respondent had seen fit to admit liability in breach of
contract and offered to pay damages or had paid a sum of money into
Court there would then have been only the one purpose; but he did
nothing of the kind. Therefore there were the two purposes, and so
the decision must be wrong, even if I had reached a different view
as to the first purpose.
