The trade purpose test is unlikely to be met in the following circumstances:
Where a payment is made for the purposes of winding up or
disposing of a business (CIR v Anglo Brewing Co Ltd [1925] 12TC803
- see
BIM38310). Where, by contrast, a payment
was found, on the facts, to be wholly and exclusively to secure
employee co-operation during the period of trading (in O'Keefe v
Southport Printers Ltd [1984] 58TC88 - see
BIM38320) it was an allowable deduction.
In view of the Privy Council decision in Commissioner of
Inland Revenue v Cosmotron Manufacturing Co Ltd [1997] 70TC292 (see
BIM38390) you should not contend that
payments made to employees under a pre-existing contractual or
statutory obligation are disallowed under the Anglo Brewing
principle. The Privy Council declined to follow the Court of Appeal
decision disallowing such a payment in Godden v A Wilson's Stores
(Holdings) Ltd [1962] 40TC161 (see BIM38390), and in consequence
Wilson’s Stores should not be cited in support of disallowing
such payments.
The Anglo Brewing principle continues to apply to ex-gratia
payments and other payments in excess of an employee's pre-existing
contractual or statutory entitlement.
Where a payment in compensation for loss of office is connected
with the purchase or sale of a business or a change of controlling
interest by the transfer of shares. There may be evidence of a
purpose other than the trade purpose in documents or agreements
governing the share transfer and the payment of compensation, or in
correspondence etc during the negotiation of such contracts. There
may also be relevant facts in minutes of meetings between the
parties, minutes of meetings of the directors and shareholders,
copies of resolutions passed at shareholders' meetings or copies of
letters from the company to the shareholders. See, for example,
Bassett Enterprises Ltd v Petty [1938] 21TC730, - see
BIM38350, James Snook & Co. Ltd v
Blasdale [1952] 33TC244, - see
BIM38340, George Peters & Co. Ltd v
Smith, - see
BIM38385), Williams v J J Young &
Son Ltd [1963] 41TC264, and George J Smith & Co Ltd v Furlong
[1968] 45TC384, see
BIM38380.
Where facts about the agreed price of shares, whether this
was connected with any compensation payments to directors or
controlling shareholders, and any services performed by the
directors following take-over were relevant to the decision. Where,
for example, retiring directors who are controlling shareholders
vote compensation to themselves shortly before or in the process of
relinquishing control, it is unlikely their purpose will be solely
a purpose of the company's trade. But it will depend on the
particular facts, and a payment which is entirely untrammelled by a
bargain for transfer of shares may be deductible (see CIR v Patrick
Thomson Ltd (in liquidation) [1956] 37TC145 -
BIM38360).
Where a payment is made by a company owned and controlled by the recipient of compensation, or by persons connected thereto, but if, on the facts, the payment was genuinely made to an unsatisfactory director to induce them to resign, and there is no identifiable non-trade purpose, it is likely to be deductible (Mitchell v B W Noble Ltd [1927] 11TC372 - see BIM38370).
Where the payment results from illegal actions (see fines - BIM42515), Cattermole v Borax Chemicals Ltd [1949] 31TC202 (see BIM38525) and Fairrie v Hall [1947] 28TC200 - see BIM38530), or from a breach of contract or legal action outside the trading activities (see Knight v Parry [1972] 48TC580 (see BIM38545) and Hammond Engineering Co. Ltd v CIR [1975] 50TC313 - see BIM38550). But a payment which is solely for trade purposes and not by way of penalty for an infraction of the law is deductible, see G Scammell & Nephew Ltd v Rowles [1939] 22TC479 - (see BIM38535) and Golder v Great Boulder Proprietary Gold Mines Ltd [1952] 33TC75 - (see BIM38540).
