BIM37717 - Wholly & exclusively: duality of, or non-trade, purpose: remuneration, etc: payment to retiring director following dispute
Payment for non-competition agreement is not allowable
The events in the case described below took place before the
introduction of the charge to tax now found in ITEPA03/S401 (which
taxes the recipient of certain payments arising in connection with
the termination or change in the duties of an office or
employment).
In the case of Deverell, Gibson & Hoare Ltd v Rees [1943]
25TC467 the company claimed a deduction for the amounts expended in
paying a sum to a departing director and for releasing that
director from a debt owed to the company.
Owing to differences which arose between Hoare and Packer,
the two directors of the company, Packer handed in a letter of
resignation, adding:
‘Unless I hear that you want to take over my connection I shall make other arrangements in regard to it.’
Hoare was advised that Packer had no rights over the business connection, which he had brought in on becoming director of the company in 1930. But for business reasons Hoare was anxious that Packer should not leave the company under a sense of grievance. This was stated in evidence that was accepted. Hoare asked Packer what he wanted. Packer asked for £600. Before his resignation took effect, Packer drew up the following minute, which was recorded in the company's minute book and signed by both Hoare and Packer:
‘It was agreed that the company purchase Mr. Packer's assets and the sum agreed upon was £450 plus the cancellation of the debt of £150 now appearing as a debt on the balance sheet against him.’
The company claimed a deduction for the £600 in computing
its profits. Hoare gave oral evidence before the Commissioners that
the company had not purchased any assets from Packer but that it
had paid the said sum to placate him and to keep the company from
being injured by him. The Special Commissioners refused the
company's claim, holding that Hoare's motives for signing the
minute could not alter the substance of the transaction from that
which was naturally to be inferred from the terms of the minute.
The courts held, that it was a fair construction of the
minute that the only effective thing done by the agreement was to
put Packer under an obligation not to set up business in
competition with the company. The deduction claimed was accordingly
inadmissible in view of what is now ICTA88/S74 (1)(f).
