BIM37740 - Wholly & exclusively: duality of, or non-trade, purpose: remuneration, etc: 'excessive' remuneration: disallow the excess

Look for arm’s length comparators as a measure of remuneration that is wholly & exclusively for the purposes of the trade

Remuneration that is paid in whole or in part for purposes other than those of the trade, profession or vocation is not allowable.

Whether and to what extent remuneration was excessive was considered in the case of Earlspring Properties Ltd v Guest [1995] 67TC259.

Earlspring Properties Ltd was a property investment company the shares in which were owned by Mrs Conchita Broomfield. At some time after the marriage of John Harry Broomfield and Mrs Conchita Broomfield in 1978, the company’s activities were enlarged to include the property consultancy part of a business carried on by John Harry Broomfield's firm.

The consultancy work was carried out by the firm on behalf of Earlspring Properties Ltd. Consultancy fees were invoiced by, and received by, the firm, and paid into the firm's deposit account. The interest earned on that account was retained by the firm as remuneration for its services. Any balance due at the end of each accounting period was shown in the accounts as a debt due to Earlspring Properties Ltd.

In February 1984 the balance accumulated in the accounting periods ended 31 March 1982 and 1983 was paid into Earlspring Properties Ltd.'s account and the same occurred on 1 April 1986 in respect of the balance accumulated in the accounting periods ended 31 March 1984, 1985 and 1986.

The firm also collected rents from Earlspring Properties Ltd.'s investment properties and paid them into Earlspring Properties Ltd.'s bank account. Earlspring Properties Ltd. had no premises and no staff. Mrs Conchita Broomfield was not involved in its consultancy work and only did necessary clerical work. In the early years Mrs Conchita Broomfield's remuneration was £1,000 but, for the periods ended in 1983 to 1988, it was in sums varying between £21,359 and £38,777, with Earlspring Properties Ltd. also paying £20,000 or £21,000 as an annual contribution to a pension fund for Mrs Conchita Broomfield's benefit.

For the accounting periods ended in 1982 to 1985 assessments were made under what is now ICTA88/S419 [loans or advances to participators] on the footing that the balances outstanding at the end of each accounting period were loans to John Harry Broomfield, an associate of a participator in Earlspring Properties Ltd. Interest determinations were made, for the same periods, under TMA70/S88 and FA89/S159, on the footing that Earlspring Properties Ltd.'s failure to give due notice of its liability for tax under what is now ICTA88/S419 constituted neglect.

An assessment under what is now ICTA88/S419 in respect of the accounting period ended in 1986 was also made but was not pursued. CT assessments for the accounting periods ended in 1983 to 1988 were raised on the footing that the remuneration paid to Mrs Conchita Broomfield during those years was not money laid out wholly or exclusively for the purposes of the company's trade within what is now ICTA88/S74 (1)(a).

Earlspring Properties Ltd.'s appeals against those assessments and determinations were dismissed by the General Commissioners (though they did not determine the CT assessments for the accounting period ended in 1988). In relation to the CT assessments the Commissioners held that the amount allowable as a deduction for director's remuneration should be limited to 5% of the taxable profits for each year. Earlspring Properties Ltd. appealed, except in respect of the what is now ICTA88/S419 assessments for the accounting periods ended in 1984 and 1985 in relation to which the Inspector had accepted that the payment of the amounts due would give rise to tax relief under what is now ICTA88/S419 (5). The Inspector had maintained that relief was also available in respect of the tax under what is now ICTA88/S419 assessments for the two earlier periods, but only by concession; the Crown did not, however, pursue that argument.

The Chancery Division held, allowing Earlspring Properties Ltd.'s appeal in relation to the what is now ICTA88/S419 assessments for the accounting periods ended in 1982 and 1983 but otherwise dismissing the appeal, that in view of the very large leap in salary in the accounting period ended in 1983, and of the fiscal advantages in the diversion of earned income to Mrs Conchita Broomfield (which would not be aggregated with Mr. John Harry Broomfield's income), and of the facility the remuneration afforded Mrs Conchita Broomfield of enabling large premiums to be paid into a pension fund for her benefit, the Commissioners were plainly entitled to conclude that the remuneration was not wholly and exclusively incurred for the purpose of the company's business but represented in part a diversion of income made to achieve a fiscal purpose, and it was for the Commissioners to determine as a fact how much, if any, of the remuneration paid could be treated as so laid out.

The main issue in the case concerned the application of what is now ICTA88/S419 and reporting requirements under TMA70/S10.