BIM38320 - Wholly & exclusively: commencement, cessation or sale of business: payment to effect orderly shut-down of trade
Payment to ensure orderly trading and not to close the business is allowable
The decision in CIR v Anglo Brewing Co Ltd [1925] 12TC803 (see
BIM38310) shows that redundancy costs
incurred to go out of trade are not allowable. The decision in CIR
v Cosmotron Manufacturing Ltd [1997] 70TC292 (see
BIM38315) shows that redundancy costs
arising out of normal terms of employment are allowable
notwithstanding that the occasion of redundancy was the closure of
the business.
In the case of O’Keefe v Southport Printers Ltd [1984]
58TC88, the company was a member of a group the parent of which was
Liverpool Daily Post & Echo Ltd. (LDPE). Southport‘s
trade was unprofitable. Its directors recommended to LDPE that it
should be closed down. It was clear that the unions would be
unlikely to allow an orderly closure if only statutory and
contractual obligations to employees were met.
Southport’s directors recommended to LDPE that LDPE
should pay a further £80,000 to Southport’s employees on
closure to protect the businesses of the members of the group. LDPE
accepted this recommendation.
The date of closure of Southport’s trade was initially
to be 31 March 1978. On 11 January, a director of Southport reached
agreement with the unions which was recorded in a letter dated 13
January. It was stated that employees would receive the balance of
wages due to 31 March as payments in lieu of notice together with
redundancy and severance payments, which were in excess of the
statutory redundancy payments, and represented the further
£80,000. It was also agreed that, although the statutory
notice to which certain employees were entitled would not expire
until 31 March, closure might be brought forward to a date early in
February.
On 16 January, Southport’s board resolved that the
effective date of closure should be 10 February. On 20 January, the
personnel manager of LDPE reported that there would be a statutory
obligation on Southport to make payments to certain employees
‘in lieu of adequate notice of termination of
employment’ totalling £8,085. On 30 January,
Southport’s board resolved to pay £30,847 in full
discharge of its contractual and statutory liabilities to the work
force, comprising:
- payments in lieu of notice £8,085,
- ii. redundancy payments £22,762.
Each employee received two cheques: one from Southport, the
other from LDPE representing the balance of his share of the
additional £80,000 agreed with the unions.
One of Southport’s directors had a dual rôle,
being in addition a director of LDPE. The Crown contended that it
was impossible for Southport to separate the purpose of achieving
the orderly conduct of its own trade prior to the date of cessation
from that of safeguarding the businesses of the other members of
the group. Accordingly the Crown contended that the latter was at
least part of Southport’s purpose in making the payments.
The Special Commissioners held that the sum of £8,085
was paid by Southport for the purpose of achieving the orderly
conduct of its trade prior to the date of cessation and was merely
a measure of its share of the total consideration payable by the
group. The payment was accordingly a trading expense, and not
precluded by what is now ICTA88/S74 (1)(a), from deduction in
computing Southport’s profits.
The Commissioners found that:
- Southport’s liability to make payments in lieu of notice was to be treated as merely the measure of its contribution to the overall payment and £8,085 had been paid for the purpose of achieving the orderly conduct of Southport’s trade up to cessation; and
- this was the only purpose of the payment.
The High Court dismissed the Crown’s appeal.
Nourse J said that he could only overturn the Commissioners
if there was no evidence to support the conclusion that they had
reached. Nourse J went on to explain that the Commissioners had had
the advantage of hearing first hand evidence from the directors
involved in the decision making process. Nourse J had no doubt that
that is the only way in which a tribunal could arrive at a proper
appreciation of the state of play with the unions at the material
time and of the effect which it had on the thinking of the
directors of any of the companies concerned. That evidence led the
Commissioners to conclude, in effect, that whatever the company had
paid, whether £8,085 or more or less, and under whatever
label, it would have been made wholly and exclusively for the
purpose of achieving the orderly conduct of its own business prior
to the date of cessation. Nourse J found that there was nothing to
lead him to overturn the Commissioners.
The decision may be contrasted to that in CIR v Anglo Brewing
Co Ltd [1925] 12TC803 (
BIM38310). The payment in Southport was
to ensure orderly trading and not to close the business.
For those who do not have ready access to tax case volumes,
the part of Nourse J’s judgement on which the above guidance
is based is set out below, 58TC108F to 109F:
On the basis of the evidence before the
Commissioners, Mr. Carnwath [counsel for the Crown]
submits, first, that part at least of the
company’s overall purpose in paying the £8,085 was to
meet its contractual and statutory liabilities incidental to the
cessation of its trade; and, secondly, that it was in any event at
least part of the company’s purpose to safeguard the
businesses of other companies in the group. Further, he says that
there was no evidence to support the contrary finding. I do not
have to say, on the facts as they appear to me from the material
which is before this Court, that I would have come to the same
conclusion as the Commissioners. It never comes amiss for the Court
to emphasise that the consequence of the principle of Edwards v
Bairstow [36TC207 - see
BIM37045]
is that its function in a case of this kind is
not to conduct a rehearing. It can only interfere if it thinks that
there was no evidence to support the conclusion of the
Commissioners. It does not seem to me that I could possibly go that
far in the present case. There was certainly some documentary
evidence to support the conclusion, in particular the last
paragraph of the letter of 13 January. Far more important, in my
view, is the fact that the Commissioners saw and heard Mr. Powell
and Mr. Clarke, [directors],
an advantage denied to me. There can be no
doubt that that is the only way in which a tribunal could arrive at
a proper appreciation of the state of play with the unions at the
material time and of the effect which it had on the thinking of the
directors of any of the companies concerned. That evidence led the
Commissioners to conclude, in effect, that whatever the company had
paid, whether £8,085 or more or less, and under whatever
label, it would have been made wholly and exclusively for the
purpose of achieving the orderly conduct of its own business prior
to the date of cessation. I do not find myself able to say that it
was not open to them on the evidence to treat the amount of the
company’s contractual and statutory liabilities merely as a
measure of its contribution to the overall payment.
That is really an end of the first of Mr.
Carnwath’s two submissions. At first sight, the second is
perhaps the more formidable. Mr. Carnwath says that it would have
been impossible for the company in a situation of this nature,
particularly in the light of the dual role of Mr. Clarke and the
mutual interests of all the companies concerned, to separate the
purpose of achieving the orderly conduct of its own business prior
to the date of cessation from that of safeguarding the businesses
of the other members of the group. Accordingly, he says that I must
assume that the latter was at least part of the company’s
purpose in making the payments. In this connection he relied on the
observations of Walton J. in Garforth v Tankard Carpets Ltd.
[53TC342 at pages 257 to 258; see
BIM38210],
and in Watney Combe Reid & Co. Ltd. v
Pike [57TC372 at pages 750 to 751; see
BIM35545].
Those decisions were not cited to the
Commissioners, no doubt because the principle is well established.
However, the principle does not raise an irrebuttable presumption.
It is clear from para 27 of the decision that the Crown argued that
the company’s payments must have been made partly for the
benefit of other companies in the group. In spite of that argument
the Commissioners found that the company did have its own separate
purpose in making the payments. I cannot say that there was no
evidence to support that finding. Indeed, earlier in para 27 the
Commissioners, in the sentence which I have already quoted,
expressly state that there was evidence to that effect. That is not
in itself very specific, but the evidence must have come from Mr.
Powell and Mr. Clarke, or one of them. It is not for me to say that
the Commissioners could not accept it, particularly in a proceeding
where I am denied a sight of a transcript of the cross-examination
of those witnesses.
