BIM37765 - Wholly & exclusively: duality of, or non-trade, purpose: loans/advances to others: architect buying shares in client companies
Professional investing in customers to secure business
In addition to the question of whether the loan or advance was made wholly and exclusively for the purpose of the claimant’s trade you should also bear in mind that the expenditure may be ruled out because it is capital.
In the case of Stott v Hoddinott [1916] 7TC85 Stott was an architect conducting a practice based in Oldham in Lancashire. Although not making direct loans, Stott claimed that he had to assist the companies to whom he provided his professional services. He did this by investing in the companies concerned by buying shares. When the shares were realised (in part to fund share purchases in similar circumstances) he realised a loss, which he claimed as an allowable expense of his profession.
The Commissioners found that Stott was not a dealer in shares and that it was not a part of his profession to deal in shares and that the losses on sales by him of shares so taken up by him were a loss on capital.
Atkin, J reminds us that what you have to do is to ascertain (in accordance with normal commercial principles except in so far as overridden by statute) the profits for the year. In relation to the profession of architect the purchase of shares in a customer represented an investment of capital. In order to secure work, Stott was obliged to make such investments but that did not prevent the investments from being just that, investments.
For those who do not have ready access to tax case volumes, the part of Atkin J’s judgement on which the above guidance is based is set out below, 7TC lower half of page 91 and the upper half of page 92:
Now, it has to be remembered that what one is dealing with in this case is profits, and as if said in the last case, profits are to be ascertained according to ordinary commercial principles, except so far as you can find that those principles are modified or altered by the express words of the Statute, and applying the rules which are laid down in the Statute. I think it is quite plain that if, in fact that which has been done is an investment in the nature of capital, and that the loss that has been suffered is a loss in the nature of a capital loss, then such a loss could not properly be deducted when you are estimating the annual profits or gains for a particular year. In this case it appears to me that the Commissioners certainly have ample evidence before them upon which they could find that these losses were losses upon capital. They seem to have treated these payments for shares by Mr. Stott, as investments made by him from time to time in the Companies by whom he was employed. No doubt it was necessary for him to make such an investment if he was to secure the contracts. But that would not, in my view prevent the investments from being investments…
…I do not think it is necessary to discuss the further question which has been raised by Mr. Montgomery [Stott’s counsel], as to whether or not this was not money wholly or exclusively laid out for the purpose of the business or whether it was not, on the other hand, a loss of capital employed or intended to be employed as capital in such trade, manufacturing, adventure or concern except that I ought to say this: Mr Montgomery argued that if this was capital, it was not capital employed in such trade manufacture, adventure, or concern, and therefore did not come within the prohibition. I think there are two answers to that: one is that that does not deal with the first principle which I laid down, that you have to ascertain profits in accordance with the ordinary commercial sense; secondly, that as it seems to me, once you have a finding that it is capital, if you find that it is employed in such trade, manufacture, adventure or concern, which must be the alternative to its being actually employed in such trade, manufacture, adventure or concern, I should have thought a fortiori it could not be brought in in estimating the profits and gains of the particular business.
