BIM37715 - Wholly & exclusively: duality of, or non-trade: remuneration, etc: paid to daughter
'Excessive' remuneration paid for a non-trade purpose is not allowable
In the case of Copeman v William Flood & Sons, Ltd [1940] 24TC53 the company was a private company formed in March, 1937, to take over the business carried on by a pig dealer; the vendor, his wife, two sons and daughter were the directors and sole shareholders. The daughter, who was in the employment of the company during the whole of the year ended 30th April, 1938, was appointed a director in January, 1938. She was then 17 years of age, and her duties consisted in answering telephone enquiries. The sum of £2,600 in respect of remuneration for her services for the period January - April, 1938, was charged in the company's accounts; of this amount she drew £70 and the balance remained at her disposal in a current account with the company. Her brother, aged 23 years, received as remuneration for the year to April, 1938, the sum of £2,600 of which he drew £277 and the balance was left in a similar current account; his duties mainly consisted of calling on farmers in order to purchase pigs.
On appeal by the company, the Crown contended that it was open to the Commissioners to consider whether the sums so charged in the accounts as remuneration were in fact wholly and exclusively laid out for the purposes of the company's trade, and that, having regard to the age and duties of the son and daughter, the sums in question could not be so regarded. The General Commissioners decided that they could not interfere with the company's prerogative to pay such sums as remuneration to its directors as it thought fit.
The High Court held, that although the sums were paid to the directors as remuneration, they were not for that reason necessarily wholly and exclusively laid out for the purposes of the company's trade; and the case was accordingly remitted to the Commissioners to determine whether the sums in question, or what proportion of them, were in fact so expended.
Lawrence J explained that whilst the Commissioners could not interfere with the directors’ commercial judgement, that was not the test. The test was how much of the remuneration was incurred wholly and exclusively for the purposes of the company’s trade. The case was remitted to the Commissioners to find as a fact whether the sums in question were wholly and exclusively laid out for the purpose of the company's trade, and if they were not, to find how much of such sums was wholly and exclusively laid out for the purposes of the company's trade.
As indicated in BIM37707, a Commissioners’ finding as to the amount of remuneration that was wholly and exclusively for the purposes of the trade is conclusive on the facts of a particular case. The Commissioners could only have been overturned where they had reached a conclusion that is unsupported by the established facts. Most cases of ‘excessive’ remuneration are determined on their particular facts. You should accept a deduction for remuneration that is commensurate with the duties undertaken and at the rate payable on an arm’s length basis by comparable employers.
For those who do not have ready access to tax case volumes, the part of Lawrence J’s judgement on which the above guidance is based is set out below, 24TC at page 56:
…I think it is perfectly true that the Commissioners cannot interfere with the prerogative of the Company to pay to its directors whatever it thinks fit, but they can find in a proper case that sums so paid are not wholly and exclusively laid out for the purposes of the trade, and it is their duty to direct their minds to that question and to that question alone. The only tribunal that can interfere with a company's prerogative to pay such sums as it chooses to the directors is the High Court in an appropriate case, but that has nothing to do with the Commissioners - the Commissioners have nothing to do with the internal economy of the company as a company; they have solely got to see whether in making up proper Income Tax accounts the sums which are to be deducted are sums which are permitted by the Income Tax Acts. It may very well be that there are sums which are paid to the directors as remuneration for their services in accordance with the articles of association and in accordance with a resolution of the company, but it does not necessarily follow in the least that they are sums which are wholly and exclusively laid out for the purposes of the trade.
The case must therefore be remitted to the Commissioners to find as a fact whether the sums in question were wholly and exclusively laid out for the purpose of the Company's trade, and if they were not, to find how much of such sums was wholly and exclusively laid out for the purposes of the Company's trade.
