BIM37770 - Wholly & exclusively: duality of, or non-trade, purpose: loans/advances to others: loans by a firm of solicitors
Money lending by solicitors not uncommon but is it truly part of their profession?
From time to time traders lend money to their customers. Most
frequently this takes the form of making sales on credit terms.
Allowance for the non-receipt of trading income is provided in the
bad debts legislation, ICTA88/S74 (1)(j) - see
BIM42700 onwards. Traders may make loans
or advances in other circumstances and the allowance of any ensuing
loss turns very much on the purpose of such loan or advance.
In the case of CIR v Hagart and Burn-Murdoch [1929] 14TC433,
a firm of writers to the signet (the Scottish equivalent of
solicitors) was not allowed a deduction for losses on loans or
advances. The decision may be contrasted with that in Jennings v
Barfield [1962] 40TC365 (see
BIM37775).
As legal representatives of a private
‘experimental’ company the firm advanced money to the
company on unsecured terms. The company was interested in the
development and manufacture of a new metal alloy but was
unsuccessful and the advances were lost. The firm claimed that the
making of loans was a part of their profession as law agents, or so
closely associated with it that the loss was an allowable expense
in computing their profits. The loans had been made in the hope of
securing further business if the company was successful and loans
had been advanced to other clients in similar circumstances.
It was held that the loss was not an allowable deduction. The
House of Lords took the view that whilst money lending by
solicitors was not uncommon, it was not truly a part of a
solicitor’s profession. Their Lordships therefore
distinguished this case from that of Reid’s Brewery Co Ltd v
Male [1891] 3TC279 (see
BIM37753).
Lord Buckmaster explained that no deduction was due because
the facts and circumstances of the loans had not been established.
There was no finding as to:
- the circumstances in which the loans were made,
- whether the loans bore interest,
- the object for which the loans had been made.
It therefore followed that there was no question of the loans
being made in the course of professional work. The judge concluded
that money lending was a separate activity from the firm’s
profession and so the losses were not allowable.
Lord Shaw of Dunfermline expressed considerable scepticism
that, notwithstanding the actual practice of this particular firm,
money lending could ever truly be part of the profession of
solicitor. The loans or advances were not therefore advanced wholly
and exclusively for the purposes of the firm’s profession.
The fact that the making of loans was a significant feature of this
particular firm’s affairs did not make money-lending part of
their profession as solicitors.
Lord Warrington of Clyffe concurred, attaching particular
importance to the finding of fact before the Commissioners that
there was not a general practice amongst Edinburgh solicitors of
lending money. The loans were therefore outside the profession that
was subject to tax and no relief was due.
For those who do not have ready access to tax case volumes,
the part of Lord Buckmaster’s judgement on which the above
guidance is based is set out below, 14TC upper and middle of page
442 and middle of page 443:
Now it appears that the loans under
consideration are not isolated instances of such transactions. The
Commissioners have found that the Appellants are ‘in the
habit of making advances to clients when required, without
security,’ and certain instances are given.
The facts and circumstances in which the loans
were made are not analysed; it is not even stated whether they bore
interest or not, and except in one case where the loan was to
purchase sheep, the object of the loan is not disclosed. It must,
therefore, be taken that in the present case there was no question
of advances being made in the strict and usual course of
professional work as, for example, in making payments to defray
expenses in connection with a law suit or the purchase of property.
The present position is strictly limited by the words of the
finding, ‘the sole relations between them and the company
were those of solicitor and client, in the course of which they
also became creditors for the advances above
mentioned.’
In my opinion the loss of money so advanced
cannot be treated as a loss in ascertaining the profits and gains
of the profession of Writer to the Signet and if it could be so
regarded without the restrictions of the rules I think it is
excluded by [what are now ICTA88/S74 (1)(a) and (e)].
It was, in fact, a separate venture from that
of Writers to the Signet and even if undertaken in the hope and
expectation that it would help their business, it was none the less
no part of their true profession…
…Lending money to clients may often be
done by Writers to the Signet, but it is no essential and necessary
part of their profession, and if a case ever arose in which it
could be held that money lending and the profession had become one
and the same business it would require a special finding of facts
to that effect before the position could approach that of the cases
quoted. Apart from this it is also true that as factors of an
estate or for special purposes money may be advanced by Writers to
the Signet under such conditions that its loss would be a proper
element in determining the balance of profits and gains, but the
facts as found here do not establish any of the special conditions
necessary to blend these payments with that of the profession in
which the Appellants were engaged.
For those who do not have ready access to tax case volumes, the part of Lord Shaw of Dunfermline’s judgement on which the above guidance is based is set out below, 14TC foot of page 444 and head of page 445:
In these cases it is desirable if possible not
to extend the ground of judgement. In my opinion one ground is
sufficient and is very clear in the present case. I do not think
that the advance of £2,615 was wholly or exclusively laid out
for the purposes of the Appellants' profession of solicitors.
Accordingly it is illegitimate in computing the amount of profits
or gains to be charged to deduct the sums stated, as [what
is now ICTA88/S74 (1)(a)]
expressly forbids such a deduction being made.
The same result, reached from the point of view of loss, would have
been reached under [what is now ICTA88/S74 (1)(e)];
but it is sufficient to decide the case on the
former ground, as taken by the Inspector of Taxes.
As to custom, while it was admitted that loans
or advances of such a kind were not an ordinary expenditure of a
solicitor's business, it was maintained in argument that they
became so in the case of the Appellants because they were
themselves in the habit at times of lending money to their clients
with or without security. Several instances in which they did so
are cited, and are, of course, quite truthfully set down. A Court
is not concerned with the motives for such transactions which may
spring from personal interest or from generosity or from a sense of
favours to come, but it is in the highest degree doubtful whether
any custom could avail to bring banking or money lending within the
scope of a solicitor's business, and it is beyond all doubt that no
custom can rest upon what an individual solicitor himself
did.
For those who do not have ready access to tax case volumes, the part of Lord Warrington of Clyffe’s judgement on which the above guidance is based is set out below, 14TC lower part of page 447 and upper and mid part of page 448:
It will be observed that there is no finding
by the Commissioners that the Appellants carried on the business of
money lending in connection with or as a branch of their business
as solicitors, nor is it stated that there is any general practice
amongst solicitors in Edinburgh so to do. The absence of the latter
statement distinguishes this case from Reid's Brewery Company, Ltd.
v Male 3TC279 …(see
BIM37753).
…The profession in respect of which the
balance of profits and gains were to be assessed was that of
Writers to the Signet. The finding of the Commissioners merely
amounts to this, that these gentlemen had from time to time been
willing under circumstances of which no particulars are given to
oblige clients in need of money by making temporary advances. No
doubt in so doing they were probably actuated by the feeling that
it was good policy to keep on good terms with their clients and
that to refuse to make advances of money might entail a loss of
business, but I cannot think that on these findings there is any
ground shown for holding that the advances in question were made
for the purposes of the Appellants' profession of Writers to the
Signet. I cannot hold that the business of money lending was so far
part of the profession of these gentlemen as carried on by them as
to be one of the purposes thereof, and I should much regret on
grounds of public interest if I were compelled so to
hold.
