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HMRC internal manual

Business Income Manual

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Wholly and exclusively: duality of, or non-trade: remuneration, etc: paid to daughter

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

‘Excessive’ remuneration paid for a non-trade purpose is not allowable

In the case of Copeman v William Flood & Sons, Ltd [1940] 24 TC 53, the company was a private company formed in March, 1937, to take over the business carried on by a pig dealer. The vendor, his wife, two sons and daughter were the directors and sole shareholders.

The daughter, who was in the employment of the company during the whole of the year ended 30th April, 1938, was appointed a director in January, 1938. She was then 17 years of age, and her duties consisted in answering telephone enquiries. The sum of £2,600 in respect of remuneration for her services for the period January to April 1938, was charged in the company’s accounts. She drew £70 of this amount and the balance remained at her disposal in a current account with the company. Her brother, aged 23 years, received £2,600 as remuneration for the year to April 1938 of which he drew £277 and the balance was left in a similar current account. His duties mainly consisted of calling on farmers in order to purchase pigs.

On appeal by the company, the Crown contended that it was open to the Commissioners to consider whether the sums so charged in the accounts as remuneration were in fact wholly and exclusively laid out for the purposes of the company’s trade, and that, having regard to the age and duties of the son and daughter, the sums in question could not be so regarded. The General Commissioners decided that they could not interfere with the company’s prerogative to pay such sums as remuneration to its directors as it thought fit.

The High Court held, that although the sums were paid to the directors as remuneration, they were not for that reason necessarily wholly and exclusively laid out for the purposes of the company’s trade. The case was accordingly remitted to the Commissioners to determine whether the sums in question, or what proportion of them, were in fact so expended.

Lawrence J explained that whilst the Commissioners could not interfere with the company’s prerogative to pay its directors whatever it thought fit, that was not the test. The test was how much of the remuneration was incurred wholly and exclusively for the purposes of the company’s trade. The case was remitted to the Commissioners to find as a fact whether the sums in question were wholly and exclusively laid out for the purpose of the company’s trade, and if they were not, to find how much of such sums was wholly and exclusively laid out for the purposes of the company’s trade.

As indicated in BIM37707, a Commissioners’ finding as to the amount of remuneration that was wholly and exclusively for the purposes of the trade is conclusive on the facts of a particular case. The Commissioners could only have been overturned where they had reached a conclusion that is unsupported by the established facts. 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.