Chapter BIM38385
| Published date | 22 November 2013 |
| Record Number | BIM38385 |
In order that redundancy payments be deducted on the occasion of a takeover, it is necessary that they shall have been considered and approved by or on behalf of the company in relation to whose trade they are said to have been made independently of any bargains struck by the shareholders with the respective purchasers of the shares.
In the case of George Peters & Co Ltd v Smith [1963] 41 TC 264, the company traded as beer, wine and spirit merchants. Its wholly owned subsidiary, J J Young & Son Ltd, carried on a trade as brewers, including the ownership of tied houses. Under an offer which became unconditional in January 1959, Friary Meux Ltd acquired the entire share capital of George Peters & Co Ltd upon terms that a sum should be set aside out of the purchase price to compensate directors and employees of George Peters & Co Ltd and its subsidiaries who became redundant. The merger meant that there was no longer a continuing role for two managing directors. Under the arrangement, in the year to 31 March 1959 George Peters & Co Ltd paid £46,000 to resigning directors and J J Young & Son Ltd paid £33,342 to employees who became redundant on the closing of J J Young & Son Ltd’s brewery.
The companies contended that these sums should be deducted in computing their profits as money wholly and exclusively laid out for the purposes of their respective trades. For the Crown it was contended that the sums were capital expenditure paid as an integral part of the agreement whereby Friary Meux Ltd purchased the shares of the appellant.
The Special Commissioners found that:
- the payments by George Peters & Co Ltd were an essential part of the bargain between its shareholders and Friary Meux Ltd and accordingly were not deductible
- the payments made by J J Young & Son Ltd were essential for the preservation of the company’s good name and its continuing trade and were deductible.
Wiberforce J explained the hurdle that a company had to pass to secure a deduction in circumstances when compensation was paid at the time of a share sale at page 284:
`[The issue has] to be considered in relation to the question whether, following the wording of [what is now S54(1)(a) Corporation Tax Act 2009], the sums in question can be considered as money wholly or exclusively laid out or expended for the purposes of the trade. It has been laid down in terms which...
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