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HMRC internal manual

Business Income Manual

Wholly and exclusively: case law: remoteness

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

What matters is the direct and immediate purpose of the expenditure

A so-called ‘remoteness’ test may be inferred from the decision in Union Cold Storage Ltd v Jones [1924] 8 TC 725. The question is whether the expenditure has a direct and immediate trading purpose.

The company had carried on the trade of cold storage proprietors on a worldwide basis, directly and through several subsidiaries. In 1915, as a result of World War I, the company faced difficult trading conditions. The company entered into an unusual but ‘commercially expedient’ agreement to transfer all of its overseas premises, plant, etc to an American company (controlled by Union Cold Storage’s principal shareholders, members of the Vestey family).

For a period of 28 years (terminable at 7, 14 or 21 years), the American company was to carry on the trades for its own benefit, subject to fixed payments to the subsidiaries to enable them to pay their dividends. No rent was payable for the premises or plant, which were to be kept in proper repair and working order, excepting wear and tear and damage by fire. An indefinite sum was to be paid, if necessary, to make up Union Cold Storage’s profits to a sum sufficient to provide for the fixed charges, dividends and provision for depreciation fund. In fact, nothing had been paid under this clause as the remaining UK trade did very well. The connection with the American company was profitable. It was in the American company’s interest to provide supplies for handling in the UK and thus diminish the likelihood of having to make any contribution to profits under the agreement.

Union Cold Storage paid the fire insurance premiums on the various properties and claimed them as a deduction. Referring to the decision in Usher’s Wiltshire Brewery Ltd v Bruce [1914] 6 TC 399 (see below) they claimed that the premises were still being used for the purpose of their trade through the arrangement with the American company. In the Court of Appeal, the Master of the Rolls, Pollock, confirmed the Commissioners’ denial of a deduction and, starting on page 740, he placed limitations on the scope of the ‘Usher’ principle:

`…it would be a very serious mistake and very misleading if the principle of the Usher’s Wiltshire Brewery case was to be supposed to be this: if you can find that the expenditure has been made on commercial lines advantageously for the purpose of the business…you are entitled to…secure any deduction. I do not think the rule was intended to be laid down so widely…’

On page 741, Pollock emphasised the need to look to the direct purpose for which the expense had been incurred:

`I think that it is impossible for us to say that the test is satisfied…that money has been laid out or expended for the purpose of their, Appellents’, business, and that it has been laid out wholly and exclusively for their business. The two items that they seek to deduct may have been wisely expended; it may have been prudent that as owners they should keep the premises insured, but what they secured by it is not a further market for their business, not an increased sale of their commodities, not an enlarged use of their services which they are prepared to render; what they have secured is an indirect result perhaps useful to, but not necessary to their own trade. The rule in Usher’s case must not be pressed beyond what it is applicable to…you must look at what is the direct concern and direct purpose for which money is laid out, and I do not think that you can go to the remoter or indirect results for which it may be possibly useful to lay out money.’

You can see that the Master of the Rolls also stresses the importance of the purpose, as against the effect, of expenditure.

The remoteness test can be difficult to apply in practice and is often of doubtful utility. You should look to establish the direct purpose for which the money has been expended.

In Usher’s Wiltshire Brewery Ltd v Bruce [1914] 6 TC 399, the company owned or leased many licensed houses which they let to tenants at a low rent in exchange for a covenant (a ‘tie’) requiring the tenant to buy all ales, beer, wines and spirits from the brewers. The tie provided the company with a ready market for its products at a price higher than it could charge non-tied customers. Although the tenants were responsible for rates and interior repairs, the company paid them. The company claimed the rates, repairs, insurance and some miscellaneous costs.

Lord Summer explained why the expenditure was allowable focusing on the brewery’s purpose and highlighting that an incidental benefit to a third party did not preclude deduction. See page 437:

`Where the whole and exclusive purpose of the expenditure is the purposes of the expender’s trade, and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party’s benefit, say that of the publican, or that the brewer…in his character of landlord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose.’

And he went on to say:

`…the brewer is a brewer first and a landlord only afterwards. His role as landlord is subsidiary, an incident of his trade as brewer.’

Lord Summer stressed the brewer’s purpose in making the expenditure rather than the effect. The purpose is a question of fact to be established by evidence. A private benefit to the payer, or a benefit to a third party may imply a non-trade purpose but in any contentious case you will need to establish that this is so to the satisfaction of the Tribunal. If such benefit is merely an incidental consequence of the expenditure and not a sought for purpose then the expenditure will be allowable if there is a clear and immediate trade purpose.

You may face claims for the allowance of money or profit foregone (for example, the situation where the taxpayer claims to deduct a sum that would have been received had they acted differently - see for instance Lowry v Consolidated African Selection Trust Ltd [1940] 23 TC 259, see BIM47110), or that if a particular outlay is advantageous to the trade then it is allowable on the authority of the Usher’s decision. But Usher’s is of narrow application only to trades where there is an especially close relationship between landlord and tenant and cannot be stretched too far. The Union Cold Storage Ltd v Jones [1924] 8 TC 725 decision specifically distinguished Usher’s.