BIM38330 - Wholly & exclusively: commencement, cessation or sale of business: cost of meeting former owner's obligations
What matters is the purpose of the payment
Where a payment is wholly and exclusively for the purposes of
the trade it matters not that the payment discharges someone
else’s legal obligation.
In the case of Cooke v Quick Shoe Repair Service, [1949]
30TC460, the taxpayer purchased a shoe repair trade and as a
condition of purchase required the vendor should discharge all
liabilities outstanding at the date of sale.
The vendor failed to do so and to preserve supplier goodwill
and ensure continuity of supplies the taxpayer paid certain sums in
discharge of the vendor’s obligations. The taxpayer sought a
deduction for the amounts paid against their income for the initial
period of trading. The Commissioners allowed the deduction.
The High Court also allowed the deduction taking the view
that it was a question of fact for the Commissioners to decide if
the purpose of the expenditure was wholly and exclusively for the
purpose of the trade.
Croom-Johnson, J after going through the relevant case law
said that the expenditure was to preserve the company’s
assets and, following Southern v Borax Consolidated [1940] 23TC597
- see
BIM35540), allowable.
The capital aspect of Quick Shoe is discussed at BIM35540.
If the agreement in Quick Shoe had been different, for
example if it had required the purchaser to pay the vendor’s
creditors then such payment would have been part of the capital
consideration given for acquisition of the business - see
BIM35655.
If the agreement in Cooke v Quick Shoe Repair Service [1949]
30TC460 had, for example, required the purchaser to meet the
vendor’s obligations then such payment would likely be
capital - see BIM35655. The cost of acquiring a business is
capital.
For those who do not have ready access to tax case volumes,
the part of Croom-Johnson J’s judgement on which the above
guidance is based is set out below, 30TC middle of page 465:
What is the general rule which ought to he
applied? I am looking at this, as I have said, to see whether these
Commissioners have misdirected themselves as to what they are to
do. Atherton v British Insulated [see
BIM35010]
was brought to their attention and I have no
doubt that they were thinking of it in arriving at their
conclusion. Perhaps it is worth reading a few lines from the speech
of Lord Cave in the House of Lords, at page 191: ‘I think it
clear that the deduction from the profits of the above- mentioned
sum of £31,784 is not prohibited by the [what is now
ICTA88/S74 (1)]
which prohibits the deduction of a
disbursement not being money wholly and exclusively laid out or
expended for the purposes of the trade. It was made clear in the
above cited cases of Usher's Wiltshire Brewery v Bruce
[6TC399 - see
BIM37200]
and Smith v Incorporated Council of Law
Reporting [6TC477]
that a sum of money expended, not of necessity
and with a view to a direct and immediate benefit to the trade, but
voluntarily and on the grounds of commercial expediency’ and
in order indirectly, to facilitate the carrying on of the business,
may ‘yet be expended wholly and exclusively for the purposes
of the trade’.
It appears to me that the findings of the
Commissioners in the present case bring the payment in question
within that direction. I need not cite passages from the speeches
of the other noble and learned Lords who came to the conclusion
that they did come to in that particular case, but, applying that
test here, it seems to me that I cannot say that there has been any
misdirection by these Commissioners in point of law.
The cases show that, if money is expended with
a view to preserving an asset, the result of it is, once the
Commissioners are satisfied of that circumstance, it may be a
deductible expenditure. That seems to be established by, amongst
other cases, the case of Southern v Borax Consolidated, Ltd.,
23TC597 [see
BIM35540],
at page 603.
