Robinson (HM Inspector of Taxes) v Scott Bader Company Ltd
| Jurisdiction | Northern Ireland |
| Judgment Date | 19 May 1981 |
| Date | 19 May 1981 |
| Court | Queen's Bench Division (Northern Ireland) |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Corporation tax-Computation of trading profits-Whether payment of salary and expenses of an employee seconded to manage a subsidiary company deductible-Income and Corporation Taxes Act 1970, s 130(a), (e) and (f).
The Respondent Company manufactures and markets chemical intermediates and synthetic resins for the making of fibre-glass. It provides these synthetics as raw materials for its subsidiary company, SBS associated companies and other customers for use in their manufacturing trades.
Originally the Respondent held only a 50 per cent. interest in SBS, a French company; but in 1975 having reviewed its operations in Europe and the profitability of SBS, the Respondent decided to go ahead with SBS and acquired the other 50 per cent. interest. Following the departure of the former managing director, the Respondent seconded one of its own employees, F, to act as manager of SBS and provide it with necessary technical and marketing expertise. The Respondent paid F's salary, expenses and social costs while he was on secondment in France.
The Respondent on appeal to the General Commissioners claimed the sum paid to F as a deduction in computing the profits of its trade on the basis that its business and trading were international in concept and execution through (inter alia) SBS. The Commissioners, allowing the appeal, decided that the Respondent and SBS contributed to and were dependent upon an international unitary business, the nature of which included marketing and the extension of markets, and thus the deduction was allowable. The Crown appealed.
In the High Court the Crown contended that the expense was not exclusively incurred for the purposes of the Respondent's trade but to protect its investment in SBS for the benefit of the trade of SBS. It was also contended that the deduction was disallowed by s 130(e) and/or (f), Income and Corporation Taxes Act 1970, and/or was a capital sum.
The Chancery Division, dismissing the Crown's appeal, held that where a parent company affords financial or other assistance, of whatever nature, to a subsidiary company, there are three possible situations: (i) it is providing such assistance solely in the interests of the subsidiary; (ii) it is providing such assistance partly in the interests of the subsidiary and partly in its own interests; and (iii) it is providing such assistance solely in its own interests (see Odhams Press Ltd. v. Cook 23 TC 233, at pages 257-8, per Lord Maugham; and Marshall Richards Machine Co. Ltd. v. Jewitt 36 TC 511, at page 525, per Upjohn J.). In situations (i) and (ii) the relevant expenditure is not deductible;
but in (iii) deduction is permissible and (applying Bentleys, Stokes & Lowless v. Beeson 33 TC 491) notwithstanding the fact that the subsidiary receives a benefit. The relevant question is "What was the object of the person making the disbursement in making it?" not "What was the effect of the disbursement when made?"In the present case the Commissioners had found that the position of SBS "vis-a-vis the Respondent was unique, the rescue operation being undertaken to further the Respondent's business in France and in Europe" and that finding could not be upset. Payment of F's wages did not come within either s 130(e) or (f) nor could it be regarded as a capital sum.
Held, in the Court of Appeal, unanimously dismissing the Crown's appeal, it was impossible to say that on the facts found, no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. Edwards v. Bairstow & Harrison 36 TC 207 applied. Furthermore, it was quite impossible to say that the payment could be regarded as a capital sum within s 130(f) of the Income and Corporation Taxes Act 1970.
Per Curiam: the word "purpose" in s 130(a) of the Income and Corporation Taxes Act 1970, contains an ingredient of "intention". It is very difficult, but perhaps not impossible, to determine this without some element of subjectivity. In many cases the test will be wholly subjective. In considering the purposes of a company there may be room for some objectivity, but it will normally be to assist in making the subjective decision. Bentleys, Stokes & Lowless v. Beeson 33 TC 491 considered.
Stated under s 56, Taxes Management Act 1970, by the Commissioners for the General Purposes of the Income Tax Acts for the Division of Wellingborough, for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the General Purposes of the Income Tax Acts for the Division of Wellingborough held at 1 High Street, Wellingborough on 3 May 1978, Scott Bader Co. Ltd. whose registered office is Wollaston Hall, Wollaston, Northamptonshire, appealed against the assessment to corporation tax in respect of profits in the sum of £486,000 made upon the said Company, (hereinafter called "the Respondent"), for the accounting period ended 2 July 1976, and claimed to deduct the sum of £16,354 from the said profits.
2. The only question for our determination, was whether or not the deduction £16,354 paid to a Mr. Fearon, is an allowable deduction against the profits of the Respondent for the said accounting period, notwithstanding s 130(a) of the Income and Corporation Taxes Act 1970, the Respondent at the commencement of the hearing having informed us that no claim was made under s 304 of the same Act.
3. At the hearing of the appeal, evidence was given on behalf of the Respondent and the Respondent's case was presented by Mr. J.S.F. Hopkinson, accountant of Messrs. Deardon Farrow, 4 Bouverie Street, London E.C.4 and Mr. J.G. Leyland, director, former company secretary of the Respondent.
4. The only documents produced to us, and which we accepted, were: (i) three letters: by Messrs. Dearden Farrow to H.M. Inspector of Taxes, Wellingborough, dated 14 November 1977: by the said Inspector to Messrs. Dearden Farrow dated 24 November 1977: and by Messrs. Dearden Farrow to the said Inspector dated 19 April 1978; and (ii) the minutes of a meeting of the Respondent's directors on 25 November 1974, and (iii) the Respondent's accounts for the 53 weeks ended 2 July 1976
The contents of these documents, so far as relevant to this Case, are incorporated herein. Copies are available for the Court if required.
5. We found the following facts proved or admitted before us:
(a) The Respondent is incorporated in England and is a wholly owned subsidiary of Scott Bader Commonwealth Ltd., a company limited by guarantee and not having a share capital.
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(b) The Respondent has the following subsidiary and associated companies:
Name
Country of
Class of shares
Respondent's
incorporation
holding
R.P. Structures Ltd.
England
Ordinary
100 per cent.
Scott Bader S.A.
France
Ordinary
100 per cent.
AB Syntes
Sweden
Capital stock
25 per cent.
Crystic GMBH
Germany
Capital stock
50 per cent.
(c) The principal activity of the Respondent during the said accounting period was, and continues to be, the manufacture and marketing of chemical intermediates and synthetic resins. In addition to its subsidiary and associated companies above, the Respondent derives royalty income from licensees in Germany, Italy, Switzerland, South Africa, United States of America and Australia.
(d) The Respondent trades in a specialised field dealing with the manufacture and supply of synthetics for fibre-glass making. It provides its synthetics as raw materials for its subsidiary and associated companies, licensees and other customers for their manufacturing trades. The Respondent also furnishes technical and marketing expertise, by means of its own personnel, to its subsidiary and associated companies.
(e) The question for our determination relates to the Respondent's French subsidiary company, Scott Bader S.A. (hereinafter called "the French company").
(f) Originally the Respondent held a 50 per cent. interest in the French company, which was making losses and showing marked lack of success.
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(g) The Respondent's determination to continue activities in France was minuted on 25 November 1974 as follows:
Minutes of Board Meeting held at 11 a.m. on 25th November 1974 atWollaston Hall
Present
G.E.S. Bader
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Chairman
R.E. Bridgeford
B.S. Parkyn
N. S. Broome
C.L. Phillips
J. T. Howlett
E. F. Schumacher
J. G. Leyland
A. A. K. Whitehouse
J. E. Thomson
Scott Bader in France
949 Further to the second paragraph of Minute 936 of 21st October 1974 this special board meeting was held to examine the position of Scott Bader Sturge SA and to decide on action as necessary. Papers were before the meeting from Mr. Truman setting out the position and from Mr. Broome itemising the points for and against the continuing operations in France. Mr. Truman and Mr. Fearon attended the meeting and opened the discussion by presenting SBS from the point of view of resources in France (site-capacities-people) and the present operation position in France (economy-market-prices-costs-Labour relations). Mr. Fearon also had available at this meeting a budget for 1975 and Mr. Leyland briefly drew attention to certain points that this budget highlighted, the main ones being that, whereas the operation appeared to be carried out in France in a very lean manner as far as staff were concerned and output was high the margin on sales was low and, if these margins could not be increased, added throughput would be needed to set above break-even level. The various matters raised were thoroughly ventilated. (Mr. Truman and Mr. Fearon left the meeting at the lunch break). After further discussion, particularly on the desirability for our continuing operation in Europe, it was unanimously agreed to go ahead with Scott Bader Sturge SA with strong support and backing from Wollaston. (Norman Parkinson left the meeting at 3.15 p.m.). Mr. Broome...
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