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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade: remuneration, etc: ‘excessive’ remuneration: establish the purpose

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

Remuneration paid for a non-trade purpose is not allowable

Remuneration that is paid for non-trade purposes is not allowable. Where remuneration is paid significantly in excess of market rates this can be an indication of the existence of a non-trade purpose. If there is a non-trade purpose for paying remuneration in excess of the commercial rate, then the excess should be disallowed. You will need to establish such a purpose to the satisfaction of the Tribunal in disputed cases.

In the case of Stott & Ingham v Trehearne [1924] 9 TC 69, a father employed his two sons in the business, their remuneration consisting of salary and, in addition, a commission on the profits at a rate fixed orally at the beginning of each year.

Before 1915, the rate of commission for each son was one twentieth of the profits, but this was increased to one tenth each for the years 1915 to 1917 inclusive, and to one third each for the years 1918 and 1919. A breakdown in the father’s health in June 1918, placed the entire responsibility of the business upon the elder son until the end of that year when the younger son returned from military service. In the accounts of the business, the commissions paid to the sons were shown as appropriations of their father’s profit.

Both sons had special knowledge of the business, and the firm claimed that the whole of the remuneration paid to the sons by way of salary and commission should be allowed as a deduction in arriving at the profits of the business for Income Tax purposes.

The Special Commissioners decided that the commission for the years 1918 and 1919 was not on a commercial footing, and that only up to 10% (instead of the full 331/3%) could be regarded as paid to the sons for services rendered as managers of the business, and as deductible in arriving at the profits of the business for Income Tax purposes.

The High Court held:

  • that the amount deductible in respect of the commission in question (as being money wholly and exclusively laid out for business purposes) was a question of fact, and
  • that, as there was evidence upon which the Special Commissioners could properly come to their decision, the court could not review it

Rowlatt J explained that the allowable remuneration was the amount expended wholly and exclusively for the trade. The Commissioners had considered all of the facts and decided that a proper deduction would be 10%. Rowlatt J was unable to interfere with this.

The Commissioners’ finding as to the amount of remuneration that was wholly and exclusively for the purposes of the trade was conclusive on the facts established. Most cases of ‘excessive’ remuneration are determined on their particular facts. You should accept a deduction for remuneration that is commensurate with the duties undertaken and at the rate payable on an arm’s length basis by comparable employers.

Rowlatt J said (starting at page 75):

`Then when the Commissioners come to decide it they also have expressions in the accountant’s letters. I do not think it comes to much, but it is a little make-weight; that is all. Then the Commissioners say to themselves:

"Are we to take it that when the father gives his sons each as much of the business as he retains himsef - he does not make them partners, but he gives them a third of the business each and retains the other third himself - is he really paying that exclusively for their services? He would have to pay them something substantial; we think 10 per cent should be attributed to that, but as to the rest he is giving it to them, and the question of what they are entitled to strictly as remuneration is merged in the payment by the father. We cannot allow it all as having been laid out for the purposes of the business."

It is not for me to say whether 10 per cent is a right figure or not. I think that is the sort of question which the Commissioners are there to decide. In this case they are Special Commissioners, but they could have appealed if they liked to local business men as Commissioners, and the Special Commissioners are in the same position. I think they had materials before them on which they could come to this decision, and therefore I cannot possibly, in my judgment, review it.’