BIM42140 - Deductions: scope of: companies

A company is a separate but artificial legal person.

The company’s purpose is established by reference to the purpose of those who are entitled to act for it (see Morgan v Tate & Lyle Ltd, 35TC367 - BIM35570).

Companies under common control

For companies under common control it may be relevant to consider if the purpose of an expense was wholly and exclusively for the trade carried on by the paying company. If two companies which share the same directors benefit from an expense incurred by one of them, facts independent of the say-so of the directors will be needed to establish that the purpose was solely for the trade of the company incurring the expense. See Marshall Richards Machine Co Ltd v Jewitt, 36TC511 (see BIM37790) and Garforth v Tankard Carpets Ltd, 53TC342 (see BIM38250).

By contrast in Vodafone Cellular Ltd & Others v Shaw 69TC376 - see BIM38220 - there was a finding of fact that the directors, in making a payment to commute the company's liability to pay royalties admittedly for the purposes of its own trade, had no conscious purpose to benefit the trades of the subsidiaries of the company. The Court of Appeal held that there was no other evidence to enable the Special Commissioners to arrive at their decision that the expenditure was dual purpose. Rather the immediate purpose of the payment was self-evidently to relieve the paying company of an onerous contractual liability of its own trade. Any benefit to the subsidiaries' trades from the expenditure was more remote, and depended on internal arrangements between group members. The possible benefit to the subsidiaries did not necessitate the conclusion that the parent must have had a second purpose, that is a purpose other than the sole commercial purpose of its own trade, in incurring the expense. On the facts any such benefit was merely an incidental effect of the expenditure.

Group service companies

Where a group service company incurs management expenses such as a central payroll, you may accept their being recharged to group members on a reasonable basis such as by reference to the number of employees in each company. In effect each company will then bear the proportion of expenses which relates to its own trade. You should normally investigate such arrangements only where expenditure is incurred by one company for the purposes of the trade of another that is outside the scope of UK tax - see INTM430000, INTM460000 and ICTA88/S770.