A payment to bring an end to a trading relationship will usually
satisfy the requirements of ICTA88/S74 (1)(a). Similarly the costs
of entering into or varying a trading relationship are likely to
satisfy ICTA88/S74 (1)(a). The cost of entering or leaving trading
relationships may however be incurred on capital account - see
BIM35530 onwards.
In the case of G Scammell & Nephew Ltd v Rowles [1939]
22TC479, the company’s directors acquired a controlling
interest in another company (Blue Belle Motors Ltd), whose
operations thereafter they carried on as directors. G Scammell
& Nephew Ltd carried on the trade of motor engineers. Blue
Belle Motors Ltd carried on the trade of running motor coaches.
Blue Belle Motors Ltd became indebted to G Scammell & Nephew
Ltd on trading account and issued debentures in its favour to
secure the debt.
Toms, the holder of the remaining shares of Blue Belle Motors
Ltd, who had been a director of the Blue Belle Motors Ltd and
claimed that he had never relinquished that office, issued a writ
against the two companies and the new directors. The latter were
advised that the arrangements that they had made with G Scammell
& Nephew Ltd as directors of the Blue Belle Motors Ltd,
including the issue of debentures, could be impugned and avoided.
This could have had the effect that some £12,000 owed by Blue
Belle Motors Ltd to G Scammell & Nephew Ltd might be lost. A
compromise was thereupon reached on terms that included, amongst
other things:
G Scammell & Nephew Ltd incurred costs of some £50 in
connection with the compromise.
The Special Commissioners held that the compromise was
effected, not for purposes of G Scammell & Nephew Ltd’s
trade, but to enable it to terminate a trading relation which it
found inconvenient with the minimum sacrifice of the balance of
account resulting from that relationship. The payments made to
secure the assent of the parties to the compromise and the legal
costs of carrying it through were not money wholly and exclusively
laid out or expended for the purposes of G Scammell & Nephew
Ltd’s trade.
The High Court, that the payments in question were made for
the purposes of G Scammell & Nephew Ltd’s trade and
accordingly they were allowable deductions in computing its profits
for IT purposes. The Court of Appeal confirmed that the expenditure
was deductible.
The Master of the Rolls, Sir Wilfrid Greene, analysed the
facts as found by the Commissioners. The Commissioners had erred in
finding that a payment to bring an end to a trading relationship
could not be made for the purposes of the trade. He concluded that
the payments were made to secure for G Scammell & Nephew Ltd
the recovery of as much as possible of what Blue Belle Motors Ltd
owed them on trading account.
For those who do not have ready access to tax case volumes,
the part of Sir Wilfrid Greene M R’s judgement on which the
above guidance is based is set out below, 22TC foot of page 496 to
head page 497 and foot page 497 to head page 498:
Now it seems to me that there is no real
evidence upon which the Commissioners were justified in finding
that Scammells entered into this compromise to enable them to
determine a trading relation. If that view be correct, and if, as I
think is the case, there is no evidence upon which the
Commissioners could find that the object of the Appellant Company
in entering into the compromise was anything except to obtain
payment of as much of the balance of the account as they could
persuade Mr. Toms to agree to, and that account being, as I have
said, a trading account, it seems to me that the compromise was a
compromise effected for the purpose of the Company's trade and for
the purpose of enabling them to recover the payment of a trading
debt owing to them from a customer, which would come into
computation in their trading account. On that basis, payments made
as a condition of obtaining that compromise which secured that
payment to them would have been payments wholly and exclusively
laid out or expended for the purposes of the Appellant Company's
trade…
… Therefore, we find this Company
finding itself in a situation of trading relationship with another
company which it wishes to get rid of because it is inconvenient to
it. On that basis, and giving full force to the qualifying word
‘trading’, it seems to me that the conclusion to which
the Commissioners have come, namely, that a compromise directed to
obtaining the termination of such a relationship was not for the
purposes of the Appellant Company's trade, is, with all respect to
them, a complete non sequitur. They seem to have thought that a
transaction entered into to get rid of a trading relationship is
one which, as a matter of law, could not be for the purposes of the
trade. It looks as though they had thought that the compromise, if
it had looked forward to some affirmative trading in the future,
might have been regarded as for the purposes of the trade, but as,
on the other hand, it was merely terminating the possibility of
disadvantageous trading in the future, it could not be for the
purposes of the trade. That seems to me, with all respect to them,
to be quite a wrong method of dealing with the matter. The
termination of a trading relationship in order to avoid losses
occurring in the future through that relationship, whether
pecuniary losses or commercial inconveniences, is just as much for
the purposes of the trade as the making or the carrying into effect
of a trading agreement.
