BIM38360 - Wholly & exclusively: commencement, cessation or sale of business: compensation for loss of office at time of takeover
Payer must show the two events are unconnected
The costs of removing employees, including directors, are not
disallowed just because the paying company is later liquidated.
The case of CIR v Patrick Thomson Ltd [1956] 37TC145,
involved three companies that were subsidiaries of Scottish Drapery
Corporation Ltd, control of which was acquired by House of Fraser
Ltd.
Changes of organisation which were made in accordance with
the policy of the latter company involved the termination of the
contracts of service of the managing directors of the three
companies and also the eventual liquidation of those companies.
Certain sums were paid by the companies to the managing directors
in connection with the cancellation of their contracts, the
payments being expressed in the first two cases to be in
satisfaction of rights to future remuneration, and in the third to
be in lieu of notice.
The companies contended that the payments were made to
relieve them from onerous contracts and were allowable deductions.
The Crown contended that the payments were not expenses of
the companies' businesses but were incidental to the schemes by
which those businesses were acquired by House of Fraser Ltd and
were made primarily for the latter company's benefit.
The Commissioners decided that the deductions claimed were
allowable.
In the Court of Session Lord President Clyde, on reviewing
the evidence agreed with the Commissioners that the sums paid to
the departing directors were unconnected to the later liquidation
of the company. No non-trade purpose having been established, the
payments could not be disallowed under what is now ICTA88/S74
(1)(a). The finding of fact that decision to liquidate the company
was not in any way connected with the decision to cancel the
managing director’s service agreement was particularly
important.
For those who do not have ready access to tax case volumes,
the part of Lord Clyde’s judgement on which the above
guidance is based is set out below, 37TC foot of page 157 to middle
page 158:
…it appears to me on the facts that the
Special Commissioners were justified in holding in the present case
that the expenditure in question was laid out for the purposes of
the Respondents' own trade and not for House of Fraser's trade. In
other words even assuming that the Respondents' trade notionally or
otherwise can be regarded as having been discontinued on the
liquidation of the Company in January, 1953, the Respondents can
still invoke [what is now ICTA88/S74 (1)(a)]
to enable them to deduct the expenditure in
question from their profits, as was done in Anglo-Persian Oil Co.,
Ltd. v Dale, 16TC253, see
BIM35505].
For the expenditure in question was made by
the Respondents themselves. It is found as a fact that the decision
to liquidate the Company in January, 1953, was not in any way
connected with the cancellation of [the managing
director’s]
service agreement, and these two events
therefore were not part of any scheme or device to secure an
advantage to [the managing director]
at the expense of the Company. Indeed it is
perfectly clear that but for the subsequent liquidation it could
never be suggested that the expenditure in question was not a
proper deduction from profits, for there would be no ground for
saying that it was not incurred for the purposes of the trade or
business.
How then can the subsequent liquidation affect
the matter? When the service agreement was discharged and the
expenditure made, liquidation was still only a possibility. The
strongest way that the matter can be put for the Crown is that
there was then a present intention to liquidate at some time in the
future. But if that is as high as they can put it then they have
not in my opinion established that the expenditure was not laid out
for the purposes of the trade, and the Special Commissioners were
well entitled so to hold. When the expense was incurred,
liquidation might have been delayed beyond the end of the Company's
financial year, and only resolved upon in the next year; it might
have been delayed for several years, as in the case of Pettigrew
& Stephens, Ltd.; it might not have occurred even yet. In none
of these events in my opinion could it be successfully maintained
that the expenditure was not laid out for the purposes of the trade
in computing the Company's profits or gains in the year 1952-53.
The purpose for which the money was expended is a question of fact
upon which the Commissioners are final (Moore v Stewarts &
Lloyds, Ltd., 8 F. 1129, 6TC501), and they have negatived any
connection between this purpose and the subsequent liquidation of
the Company, which appears to have been decided upon after the
payment was made. I can find nothing in the findings which would
justify me in holding that the Special Commissioners drew a wrong
inference, or that we should differ from their conclusion on such a
matter.
