Bott (E.) Ltd v Price
| Jurisdiction | England & Wales |
| Judgment Date | 01 December 1986 |
| Date | 01 December 1986 |
| Court | Chancery Division |
Chancery Division.
Mr. A.H. Norris (instructed by Messrs. Hetherington & Co.) for the taxpayer company.
Mr. A.G. Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Hoffmann J.
The following cases were referred to in the judgment:
Heather v. P-E Consulting Group Ltd. ELRUNK[1973] Ch. 189; [1973] 1 All E.R. 8
Jeffs (H.M.I.T.) v. Ringtons Ltd. UNKTAX[1986] 1 All E.R. 144; [1985] BTC 585
Mallalieu v. Drummond (H.M.I.T.) ELRTAX[1983] 2 A.C. 861; [1983] BTC 380
Trading profits - Allowable deduction - Expenditure wholly and exclusively for purposes of trade - Company established trust for benefit of employees - Payments made to trustees - Whether payments deductible in computing profits - Whether payments wholly and exclusively for purposes of trade - Income and Corporation Taxes Act 1970 section 130 subsec-or-para (a)Income and Corporation Taxes Act 1970, sec. 130(a).
This was an appeal by the taxpayer company against a decision of General Commissioners that payments made by the company to a trust fund set up for the benefit of its employees were not made wholly and exclusively for the purposes of its trade.
The issued share capital of the company, which traded as fishmongers and poulterers, was held by two elderly directors and their wives. Employees of long standing feared that the company would cease trading when the directors died, so the company decided to set up a trust to hold shares in the company for the benefit of employees, i.e. to preserve the trade of the business and the business as an employer on the death of the directors. The trustees had power to purchase shares in the company, having regard to the need to secure the future of the company and the well being of employees. The company paid £2,500 to the trustees in 1981 and made two further payments in 1982 and 1984, with which the trustees acquired five per cent of the issued share capital.
The inspector disallowed the deduction of the payments in computing the company's profits. The company appealed to General Commissioners who dismissed the appeal, holding that, while the payments were of a revenue nature, they were not deductible because they had not been made wholly and exclusively for the purposes of the company's trade, within the meaning of the Income and Corporation Taxes Act 1970 section 130 subsec-or-para (a)Income and Corporation Taxes Act 1970, sec. 130(a). The Commissioners found as a fact that the company depended on skilled and experienced employees but contrasted that with the fact that it did not depend on the expertise of highly qualified staff. They also noted that the trust deed contained no obligation on the part of the company to make contributions beyond the initial one, nor on the part of the existing shareholders to offer their shares to the trustees. The Commissioners also appeared to hold that one of the "intentions" of the trust was to mitigate capital transfer tax. The company appealed to the High Court.
Held, allowing the company's appeal:
The Commissioners had misdirected themselves in attaching significance to specific distinctions between the trust deed in the case and that in another in which payments to trustees had been held to be deductible, when those distinctions were in truth insubstantial. Similarly the trust was set up in a way which did not create a liability to capital transfer tax, and there was thus no suggestion that its creation would have mitigated the shareholders' or anyone else's liability to that tax. On the facts found by the Commissioners, that the company's business depended on its employees who legitimately feared for the future and whom the scheme was designed to benefit, the only reasonable conclusion was that the payments were made wholly and exclusively for the purposes of the company's trade.
Stated under Taxes Management Act 1970 section 56sec. 56 of the Taxes Management Act 1970 by the Commissioners for the general purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the General Commissioners for the division of Slough held on 5 December 1984 E. Bott Ltd. (hereinafter called "the company") appealed against a decision by H.M. Inspector of Taxes dated 30 September 1983 restricting to the sum of £21,012.00 the losses for the company's accounting period to 31 March 1981 available to carry back under Income and Corporation Taxes Act 1970 section 177 subsec-or-para (2)sec. 177(2) of the Income and Corporation Taxes Act 1970 against the profits of the company's accounting period to 31 March 1980 and against estimated assessments to corporation tax for the accounting periods to 31 March 1982, 1983 and 1984 in the amounts of £2,000, £5,000 and £2,000 respectively.
2. In essence, the question posed was whether in computing its profits assessable for the purpose of corporation tax the company was entitled to deduct the payments by it to the trustees of the settlement made on 1 April 1981 by the company of the one part and those trustees of the other part and hereinafter called "the settlement".
3. Mr. Meehan conducted the appeal, calling his colleague, Mr. P.J. Sudell BA FCA (of Messrs. Sudell, Turnbull & Co.) as his only witness. The inspector appeared in person assisted by Mr. N. Edmondson (H.M.I.T.). He called no witnesses.
4. [Paragraph 4 set out the documents proved or admitted before the Commissioners.]
5. The Commissioners found the following facts:
(a) The company was incorporated in 1945 with an authorised share capital of £7,500 in £1 ordinary shares, of which 4702 were issued. The company trades as fishmongers and poulterers at Gerrards Cross, Bucks. Except for 250 shares held by five employees, the company's issued share capital was (prior to the scheme arising under the settlement) owned by two directors/shareholders (and/or their wives), all of mature years. Indeed it appears that one of them, aged 75, had retired from day-to-day management and, on account of his wife's health, had moved to Spain. The employees of the company feared that on the deaths of the two directors and/or their wives, the company would not necessarily be able to continue in its present form and this would have a most adverse effect on its skilled and long serving employees, on whom it largely depended.
(b) These employees having become aware of the implications of the situation expressed concern. Some of them were themselves shareholders.
(c) The company's accountants, Messrs. Turnbull & Co. (now Sudell, Turnbull & Co.), were invited to consider the problem of the continuance of the company and trade, in order to preserve the business, for the benefit of the employees and to secure their continued employment in the event of the death of one or both of the major shareholders. The accountants were invited to make recommendations on this, and on doing so took account of the provisions of capital transfer tax legislation and also of the available reliefs.
(d) Mr. Sudell did not consider or suggest a share option scheme (as, e.g. under Finance Act 1978 section 60sec. 60 of the Finance Act 1978) as they were not designed so as ultimately to pass to the scheme...
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