BIM38210 - Wholly & exclusively: companies: establishing a company's purpose

Established by reference to the purpose(s) of those entitled to act for the company

A company is a separate albeit artificial legal person. You should establish a company’s purpose by reference to the purpose of those who are entitled to act for it. Lord Reid described the position in Morgan v Tate and Lyle [1954] 35TC367 see BIM35570 at page 415:

It was agreed that, in order to determine for what purposes money was spent, it is necessary to ascertain what was in fact the purpose of the trader in spending the money. In this case the trader was a limited company, which in the eye of the law is a person distinct and different from the shareholders or any of them, and such an artificial person cannot in any real sense have a purpose. But the purpose of the body which was entitled to act and did act for the Company must be held to be the Company’s purpose. 

For companies under common control you may need to consider if the purpose of an expense was wholly and exclusively for the trade carried on by the paying company. If two companies sharing the same directors benefit from an expense incurred by one of them, you will need to establish facts independent of the directors to establish that the purpose was solely for the trade if the company incurring the expense. If it was not then no allowance will be due. See Upjohn J in Marshall Richards Machine Co Ltd v Jewitt [1956] 36TC511 (see BIM37790), 36TC at the foot of page 525:

It is normally a question of fact whether the disbursement in question is laid out wholly and exclusively and for the purposes of the trade of the parent company: or, secondly, whether it is laid out wholly and exclusively for the purposes of the trade of the subsidiary company; or, thirdly, whether it is laid out partly for the one and partly for the other. In the first case the parent company succeeds in getting an allowance; in the other two cases it does not. 

And also Walton J in Garforth v Tankard Carpets Ltd [1980] 53TC342 (a case concerning the deductibility of payments made under a guarantee given by a manufacturing company in respect of a property owning associated company - see also BIM37065), 53TC at 348G to 349A:

On those findings the Commissioners allowed the appeal and reduced the assessment to nil. The Inspector expressed dissatisfaction, and all the usual steps have been, albeit belatedly, taken.

It is common ground between the parties that the first question which arises is, following the wording of [what is now ICTA88/S74 (1)(a)], whether the £40,000 and interest was or was not ‘wholly and exclusively laid out or expended for the purposes of’ Carpets’ trade. Mr. Allcock, for Carpets, cited to me the well-known case of Bentleys, Stokes & Lowless v Beeson [33TC491,see BIM37400], as authority for the following propositions:

that whether the money had been so expended was a pure question of fact;

that the answer to the question depended upon the subjective objective of the directors of Carpets; and

that the fact that expenditure wholly and exclusively on their own trade in this manner might involve side effects on other parties did not deprive the expenditure of its quality in this regard;

and he concluded by submitting that there was evidence in the shape of certain primary facts as found by the Commissioners which justified their conclusion that the money was wholly and exclusively expended for the purposes of the trade of Carpets.