BIM38340 - Wholly & exclusively: commencement, cessation or sale of business: compensation for loss of office at time of share sale
Payer must show the two events are unconnected
Where compensation is paid to departing directors at or about
the time of a share sale the company must demonstrate that the two
events are unconnected.
In the case of James Snook & Co Ltd v Blasdale [1952]
33TC244, an agreement for the sale of shares of the company
provided amongst other things that the purchaser would procure the
company to pay compensation for loss of office to the directors and
the auditor of the company who, under the sale agreement, were to
resign. The purchasing company said that it sought the removal from
office of two directors because they were of advanced years and
their methods were old-fashioned.
The General Commissioners held that the compensation paid was
not an allowable deduction in computing the company's profits.
Donovan J explained why the compensation payment was not
deductible. The mere fact that the compensation was paid on the
occasion of the share sale did not make it disallowable. But the
two events happening at or about the same time placed the onus on
the company to prove that the one was unconnected with the other.
The duality of purpose in the payment in this case was fatal
to the claim for deduction.
The agreement, as originally envisaged, was varied. When the
purchasing company or its directors, further considered the matter,
they came to the conclusion that two of the four directors of the
appellant company should not be called upon to retire but should be
called upon to continue in office so that they would provide
continuity in the management of the appellant company. In
consequence of that change, the total amount of compensation was
reduced. The Master of the Rolls, Sir Raymond Evershed, thought
that circumstance, was not material, except perhaps to show that,
the inevitable conclusion to be drawn was that the question of
retirement and payment of compensation was part and parcel of the
arrangement made in the sale agreement.
For those who do not have ready access to tax case volumes,
the part of Donovan J’s judgement placing the onus of proof
on the company is set out below, 33TC page 251 at end of Donovan
J’s judgement:
The mere circumstance that compensation to
retiring directors is paid on a change of shareholding control does
not of itself involve the consequence that such compensation can
never be a deductible trading expense. So much is common ground.
But it is essential in such cases that the company should prove to
the Commissioners' satisfaction that it considered the question of
payment wholly untrammelled by the terms of the bargain its
shareholders had struck with those who were to buy their shares and
came to a decision to pay solely in the interests of its
trade.
This may be very difficult at times, because
the persons who have to take the decision are often the persons who
are to get the compensation; but any difficulty in securing an
independent decision by or on behalf of the Company does not do
away with the necessity of securing it if a title to deduct the
compensation as a trade expense is to be sought. Evidence proving
such a decision is wholly lacking here: so that the Commissioners
had before them evidence establishing that payment of compensation
was one of the terms of the bargain for the purchase and sale of
the shares and no evidence that the Company considered the matter
independently and decided to pay the compensation solely to advance
its own trading interests. In those circumstances the Commissioners
found that the compensation was not paid wholly and exclusively for
the purposes of the Company's trade. That decision is one of fact;
there is evidence to support it; and therefore I cannot interfere
with it. The appeal in my judgment must be dismissed.
For those who do not have ready access to tax case volumes, the part of Sir Raymond Evershed M R’s judgement dealing with the variation of the agreement is set out below, 33TC head of page 255 to end of judgement:
…I think it is plain that the motives or
purposes in this matter must have been mixed. It was, no doubt -
and I accept the statement of the Commissioners and of Mr. Bell -
considered advantageous, from the point of view of the Appellant
Company as a trading concern, that these directors should be
persuaded to retire. But the bargain was made by the shareholders
of the Appellant Company with somebody who had a separate interest
in the matter, namely, the concern of getting the best bargain they
could for that which they were giving. In those circumstances, it
seems to me that there can be no quarrel with the Commissioners
when they state that, having considered all the evidence which had
been given, they were not satisfied that the onus had been
discharged by the Appellant Company of proving that the sum in
question was ‘wholly and exclusively expended’ for the
purposes of the Appellant Company's trade.
I only add a reference to one sentence in
Donovan, J's judgment. He said: ‘The mere circumstance that
compensation to retiring directors is paid on the change of
shareholding control does not of itself involve the consequence
that such compensation can never be a deductible trading expense.
So much is common ground. But it is essential in such cases that
the Company should prove to the Commissioners' satisfaction that it
considered the question of payment wholly untrammelled by the terms
of the bargain its shareholders had struck with those who were to
buy their shares and came to a decision to pay solely in the
interests of its trade’. With that sentence no one has
quarrelled, and I venture to think no one could quarrel. The
learned Judge came to the conclusion that the Commissioners were
justified in saying that the onus which the Appellant Company had
to discharge had not been discharged.
