BIM37780 - Wholly & exclusively: duality of, or non-trade, purpose: loans/advances to others: payment under guarantee given to exhibition
For what purpose was the guarantee given?
As explained in
BIM37770, traders from time to time lend
money to their customers and allowance for any losses turns on the
purpose of such loan or advance; was the making of the loan or
advance wholly and exclusively for the purposes of the
lender’s trade? Similarly, traders may give guarantees of
customer loans or indebtedness to third parties. Amounts paid under
such guarantees will only be allowed if the guarantee was given
wholly and exclusively for the purpose of the trade, profession or
vocation of the lender and the loss was not on capital account.
In Jennings v Barfield [1962] 40TC36 (see
BIM37775) the loss incurred by a
solicitor in guaranteeing a client’s bank loan was allowed.
In the case of Morley v Lawford [1928] 14TC229, the loss sustained
by a firm of asphalters under a guarantee was also allowed.
The company was guarantor to the extent of £500 to the
Wembley exhibition and sought a deduction for the sum of £375
that they were eventually called upon to pay. The company became
guarantors because they had been assured that they would be given
preference in the allocation of contracts for work at the
exhibition; in the event they were not given the opportunity to
tender. The company traded as asphalters. The company not being
invited to tender was held to be an irrelevance, it would have made
no difference to the approach if they had been successful and won a
lucrative contract. The issue was whether the liability as
guarantor was undertaken for the purposes of their trade.
The Commissioners found that the sum paid under the guarantee
was incurred wholly and exclusively for the purposes of the
company’s trade.
In the High Court, Rowlatt J reversed the Commissioners on
the grounds of ‘remoteness’. The Court of Appeal
reinstated the Commissioners’ decision on the grounds that
there was no evidence in the stated case that the company when
giving the guarantee had any purpose in mind other than the
furtherance of their trade by getting contracts for work. In the
Court of Appeal, the Master of the Rolls, Lord Hanworth, explained
the difficulty in deciding wholly and exclusively cases. There was
no universal touchstone. After discussing whether the issue was one
of fact or law, Lord Hanworth explained that the
Commissioners’ decision should be reinstated because it was
one that they were entitled to reach on the evidence before them.
You should note the importance attached to establishing in
detail what exactly the trade comprises. Does the payment fall
within the scope and conduct of the actual trade carried on? If it
does (as in Jennings v Barfield, see BIM37775, and Morley v
Lawford) then you should allow any loss. If it does not (as in CIR
v Hagart and Burn-Murdoch [1929] 14TC433 (see BIM37770) then no
allowance is due. Each case turns on its own particular facts.
Where the payment was for the purpose of the payer’s
trade you should then consider if it was on capital account, see
BIM35000 onwards.
For those who do not have ready access to tax case volumes,
the part of Hanworth J’s judgement on which the above
guidance is based is set out below, 14TC foot of page 239 and head
of page 240 and 14TC upper and mid part of page 244:
Now it is clear that however much you may try,
it is extremely difficult to lay down any fast rule by which you
can apply a definite to touchstone to determine whether a proposed
deduction falls to be allowed under those principles. Lord Loreburn
says in the Woodifield case [see
BIM37300]:
‘Many cases might be put near the line,
and no degree of ingenuity can frame a formula so precise and
comprehensive as to solve at sight all the cases that may
arise’. It is important to bear in mind that well founded
observation, if I may respectfully say so, in the consideration of
the present case. You cannot find a formula, which will answer the
question off-hand. The difficulty is illustrated by the number of
cases which have been decided on the one side and on the other. For
instance, in the Stott case [see
BIM37765]
it was determined that the loss of certain
shares which were taken up for the purpose of enhancing the
business of the Appellant and which were ultimately sold for the
purpose of providing funds for securing new contracts, was a loss
of capital and was not an admissible deduction in arriving at the
Appellant's profits…
…After looking at the cases which have
been decided on the one side and on the other - cases in which the
answer has been ‘no’ and cases in which the answer has
been ‘yes’ to the deduction claimed - it appears to me
that as a matter of business it is impossible on the facts of this
present case to say that this contribution lies so far outside the
scope and purpose of the business they carried on as to make it
impossible for the Commissioners to come to the conclusion they
did. Many illustrations can be given and suggested. Some are
suggested by the learned Judge in his judgment. The question of a
contribution to a hospital on the one side, the cost of advertising
on the other. But all those illustrations bring into purview the
consideration that this must be a matter of degree. What is allowed
in one business could not be allowed in another; what is wholly
extraneous in one business may be germane to another. It appears to
me, after very carefully considering the facts and applying the
Rules most closely as contended for by the Attorney-General, there
is evidence upon which the Commissioners could reach the conclusion
which they have reached. They could decide upon the facts that both
the tests required by Lord Cave are answered, and therefore it
appears to me that the learned Judge was not justified in
overruling a decision on a question of fact, more especially as the
duty of assenting to what are questions of fact and not disturbing
them has been re-affirmed by the House of Lords in the Lysaght
case [13TC511].
