Mawsley Machinery Ltd v Robinson (HM IT)
| Jurisdiction | England & Wales |
| Judgment Date | 18 August 1998 |
| Date | 18 August 1998 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr AN Brice.
1. The agreed question for determination in the appeal now before me is-
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(1) Whether payments made by Mawsley Machinery Limited ("the appellant") to the "Mawsley Employee Trust" in each of the three successive accounting periods ending on 31 March 1994, 31 March 1995 and 31 March 1996 are deductible in computing the profits of the said years, specifically,
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(a) did the aforesaid payments constitute capital rather than revenue expenditure for taxation purposes; and
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(b) were the aforesaid payments wholly and exclusively laid out or expended for the purposes of the trade of the appellant:
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(2) Assuming the aforesaid payments are held to be deductible in computing the trading profits of the appellant, then, as a matter of law, when are the payments properly to be deducted: in the accounting period when made (as the appellant contends), or at some later time (as contended by the respondent Inspector).
2. Copies of the notices of assessment for each year were put in evidence together with the amount of profits chargeable to corporation tax which the appellant contends is correct. I have to say at the outset that the appeal for each year fails and I confine the assessments. The second question for determination consequently does not arise and with some regret and with respect to the distinguished witnesses who gave expert evidence, I have no occasion to consider interesting questions concerning Statement of Standard Accounting Practice 2, Financial Reporting Standard 5 and Urgent Issues Task Force Abstract Number 13.
3. Mr James Morris of Messrs Howes Percival, solicitors at Cliftonville, Northampton, represented the appellant Mr Timothy Brennan of Counsel appeared on behalf of the Respondent Inspector, Mr C S Robinson.
4. (1) There were put in evidence two bundles of documents of which one was agreed and the other was not. I omit reference to the expert evidence.
(2) Oral evidence was given by
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(a) Roger Maxwell Kimbell, the controlling shareholder in and managing director of the appellant, and
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(b) Jane Elizabeth Sheldon, the commercial director of the appellant, with responsibility for its finances and administration. Each of the two witnesses provided a witness statement.
5. The facts
(1) The appellant was formed in 1981 and commenced trading in March 1981. Since that date Mr Kimbell has been its managing director and controlling shareholder. The appellant was the vehicle through which Mr Kimbell bought out the construction plant sales division of a Midland company whose senior management wished to concentrate on the business of plant hire.
(2) The appellant commenced trading with seven personnel. It now has a workforce of thirty, excluding directors. The appellant has had and continues to hold important distributorships. Its business principally consists in the sale and repair of machines used in the civil engineering and construction industries (compaction equipment, equipment for handling rough terrain materials, portable air compressors, site dumpers, mini excavators, spare parts). The appellant has traded successfully.
(3) Mr Kimbell is well aware of the importance of keeping the appellant's employees contented, specially key people, through the commitment to them displayed by himself as the proprietor of the appellant. Small holdings of shares, 250 were acquired at par value in 1985 by a Mr Ian Wright and in August 1988 by Mrs Sheldon before they became directors. (Mrs Sheldon was appointed director June 1989.) A Mrs Cammack similarly acquired 250 shares in 1985 which she sold to Mr Wright and Mrs Sheldon when she ceased to be employed by the appellant in September 1991. The purchasers' respective holdings increased to 375 shares (issued capital £5,750).
(4) Between 1985 and 1990 (and later) Mr Kimbell received, and rejected, enquiries and offers (up to £1m) from third parties to purchase the shares in the appellant. He did not wish control to leave the existing directors nor the redundancies to occur which would be inevitable if a sale took place. His fellow directors would not in his view be able to mount a management buy-out.
(5) Late in 1991 Mr Kirnbell received an invitation to discuss with Mr Morris the contents of a talk he had given concerning private companies which might be relevant to the appellant.
(6) On 5 February 1992 Mr Morris wrote to Mr Kimbell:
Dear Roger
When we met before Christmas we briefly discussed the eventual succession of your majority shareholding in Mawsley Machinery Limited ("the Company"). I understand that you plan to retire in 7 years time or thereabouts. At that time, if not sooner, you will wish to realise the value of your controlling shareholding. I agreed to write briefly with any outline suggestions as to how your exit from the Company might be achieved.
1. The problem Defined
The most straightforward solution would be to seek to sell your shareholding to a third party. However, this precludes your fellow directors and younger colleagues from acquiring the ownership of the Company. It is your wish that, if possible, your colleagues should have the opportunity to acquire the Company and hence control their future destiny. The age and financial circumstances of your colleagues are such that they could not be expected to finance the purchase at market value of your controlling shareholding.
2. The Buy-Back of Your Shares by the Company
I need not read this paragraph. Paragraph 3, so far as material reads as follows:
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3. The Use of an Employee Trust to Purchase Your Shares
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3.1 An alternative strategy would be to create a discretionary trust for the benefit of some or all of the Company's directors and employees. The trustees would borrow money from a third party to finance the purchase of your shares. The sale of your shares to the trustees will realise a capital gain. It may be desirable for your shares to be purchased in successive tranches so as to fully utilise your annual exemption for Capital Gains Tax and also to ease the financing cost of funding the employee trust.
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3.2 The Company will be able to make contributions to the employee trust which will be fully deductible for Corporation Tax purposes. These contributions will enable the trustees to service the loan interest and repay the loan capital. In other words full tax relief will be available on the cost of repaying the loan capital as well as the loan interest.
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3.3 The shares acquired by the employee trust could later be distributed to some of your colleagues.
Paragraph 5.1 sets out the "Conclusion".
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5.1 This suggested use of an employee trust reconciles your desire to realise the value of your shareholding and also allows the shares to be passed on to key managers and employees in a tax efficient manner. The employee trust allows the purchase of your shares to be financed in a highly tax efficient manner.
With the last paragraph, Mr Kimbell agreed. Indeed, in his evidence in chief Mr Kimbell said
The trust purpose [was as a] vehicle which would acquire my shares and be handed to my co-directors and others when I retired. I wanted to get a fair price for the shares when I retired amicably and not adversarially. The trust was funded in advance for the purpose of buying my shares and saved going to a merchant bank.
In cross-examination Mr Kimbell agreed that the primary purpose of the trust was to purchase his shares as and when he decided to go.
And his understanding coincided with that of counsel in his opinion (January 1996, p.160 agreed documents):
However, as I understand it, the Trust is not intended as a means of passing shares to employees as part of a remuneration scheme, although it is possible that some shares at least may be distributed gratuitously or on beneficial terms. Rather the primary purpose of the Trust is to act as a vehicle to purchase shares from the controlling shareholder as...
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