Where payment (of compensation for loss of office) is linked to
share sale it is not allowable notwithstanding evidence to show
that the sums paid under the two headings were computed quite
separately.
In the case of Bassett Enterprise Ltd v Petty [1938] 21TC730,
the company was controlled by family members many of whom had
contracts of employment at wages in excess of market rates. The
company appointed a chartered accountant as general manager for ten
years at a substantial salary.
About a year later an action commenced in the High Court to
restrain one group of the family from carrying into effect an
agreement to sell their interest in the company to a prospective
purchaser. It was settled on terms that:
The company contended that the service agreements were onerous and that the payments made in respect of their cancellation should be allowed as deductions in computing its profits for IT purposes. The Special Commissioners’ findings included the following:
…the question of the amount to be paid as compensation was kept quite separate from the question of what price should be paid for the shares, and that [Mr. Watts] refused to discuss the latter until the former had been settled…
The Special Commissioners held that the cancellation of the
service agreements was part of the share purchase transaction and
that the expense incurred was not required in the company's
interests but in the interests of the purchaser of the shares; and
they dismissed the appeal.
Lawrence J on reviewing the facts found that there was ample
evidence for the Commissioners to conclude that the compensation
payments were linked to the share sale and so were not deductible.
The judge found the following points significant:
For those who do not have ready access to tax case volumes, the part of Lawrence J’s judgement on which the above guidance is based is set out below, 21TC foot of page 738 to end of judgement:
…the circumstances are such that they
afford, in my opinion, evidence upon which the Commissioners could
find that the expense of the sums paid to the members of the
Bassett groups was not incurred in the interests of the Company,
but was part of the share purchase transaction. I think that there
was ample evidence upon which the Commissioners might come to that
conclusion, and I think their conclusion is supported not only by
the fact that the transactions took place at the same time and were
contained in the same documents, but also by the fact that the
members of the groups were not paid with reference to the facts of
the case but were paid one fixed level sum of £1,500 each,
notwithstanding that some of them were performing no services and
others were performing services which were valued, in the only
piece of evidence there is upon the subject, at various
figures.
With reference to [the general
manager],
I think there is no evidence upon which the
Commissioners could have come to the conclusion that the sum paid
in discharge of his service agreement was wholly and exclusively in
the interests of the Company, and, further, that that transaction
was equally connected with the share purchase transaction and the
transaction under which the members of the Bassett groups received
their compensation.
I hold, therefore, that the conclusion which I
understand the Commissioners arrived at, namely, that these
payments were not wholly and exclusively made for the purposes of
the Appellant Company, was right, and I think the appeal must be
dismissed with costs.
