BIM38540 - Wholly & exclusively: fines, penalties and damages: cost of settling civil action, trade purpose?
Civil damages, not intended to be punitive, may be allowable
As explained in
BIM38530, the costs of civil damages
arising as a result of normal trading operations are generally
allowable. It is essentially a question of fact whether damages
arise out of trading or other matters. The High Court will only
overturn Commissioners where their finding meets the criteria set
out in Edwards v Bairstow & Harrison [1955] 36TC207 - see
BIM37045.
In the case of Golder v Great Boulder Proprietary Gold Mines
Ltd [1952] 33TC75, the company was a gold-mining concern which in
1934 and 1935 entered into transactions connected with the
formation of other companies. The £27,500 profits from these
transactions were included in subsequent IT assessments. In 1941
and 1942 civil actions were brought against the company in
connection with the formations, and the company paid £25,000
to settle the actions. Legal costs were also incurred.
On appeal before the Special Commissioners, the company
contended that the sum of £25,000 and the legal costs were
admissible deductions in computing its profits for taxation
purposes.
The Crown contended that, notwithstanding the earlier IT
assessments, the company was not engaged either in a separate trade
of company promotion or in a composite trade of gold mining and
company promotion. So that the question of the deduction could not
arise. Alternatively that the £25,000 and legal costs were not
laid out wholly and exclusively for trade purposes.
The Special Commissioners held that the transactions by which
the companies had been formed and sold were trading transactions.
And that the £25,000 and legal costs were wholly and
exclusively laid out for trade purposes.
Donovan J in the High Court held that the Commissioners'
decision was correct. The company’s trade was that of trade
promotion. That trade had not been abandoned. The claim made
against the company was one that would have been very damaging to
its trade had it succeeded. The cost of settling the claim was an
allowable expense. The damages paid were not punitive.
For those who do not have ready access to tax case volumes,
the part of Donovan J’s judgement on which the above guidance
is based is set out below, 33TC foot of page 94 to head of page
95:
The question whether a sum is or is not wholly
and exclusively laid out for the purposes of the trade is a
question of fact and if there were evidence to support the
Commissioners' finding I cannot interfere. Here they had the
following evidence: a trade of company promotion was carried on and
profits earned by the sale of assets to the company which had been
promoted. There was no evidence establishing that such a trade had
been abandoned. Arising out of that trade a claim for damages was
made against the Company which would seriously affect its
reputation as a company promoter if the claim succeeded. The
Company settled with its adversaries for reasons thus described,
again by Mr. Binns: ‘In seeking a settlement the board had
had in mind the very large and serious liability in costs with
which the Company would be faced even if it won the actions and in
costs plus damages if it lost. Those had been the main
considerations; it was a question of saving money and they had
thought it cheaper to settle for £25,000 than to run a
risk.’ In contradistinction to that part of Mr. Binns'
evidence about payment of dividends, he is here clearly speaking
about the position just before payment of the money and he is
describing the purpose of the payment.
With that evidence before them the
Commissioners held that the £25,000 and the attendant costs
were disbursements made wholly and exclusively for the purposes of
the trade. I cannot say they were bound in law to hold the other
way, and I therefore am unable to sustain the Crown's appeal in
either case.
