Chapter BIM38330
| Published date | 22 November 2013 |
| Record Number | BIM38330 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009
What matters is the purpose of the paymentWhere a payment is wholly and exclusively for the purposes of the trade it does not matter if the payment discharges someone else’s legal obligation.
In the case of Cooke v Quick Shoe Repair Service [1949] 30 TC 460, the taxpayer purchased a shoe repair trade and, as a condition of purchase, required the vendor to 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 said that the expenditure was to preserve the company’s assets and, following Southern v Borax Consolidated [1940] 23 TC 597, see BIM35540), was allowable as a deduction from trading profits.
As part of the judgment, Croom-Johnson J also considered and dismissed the Crown’s argument that the payment was capital. For a discussion of why the payment is a revenue expense, see BIM35540.
If the agreement in Quick Shoe had been different, eg 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.
The part of Croom-Johnson J’s judgment on which the above guidance is based is set out at page 465:
`What is the general rule which ought to be 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 [and Helsby Cables Ltd [1925] 10 TC 155, 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 S54(1)(a) Corporation Tax Act 2009] which prohibits the deduction of a disbursement not being...
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