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HMRC internal manual

Business Income Manual

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Wholly and exclusively: duality of, or non-trade, purpose: remuneration, etc: payment to retiring director following dispute

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

Where purpose not clear, the effect of expense may be persuasive

The events in the case described below took place before the introduction of the charge to tax now found in S401 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) (which taxes the recipient of certain payments arising in connection with the termination or change in the duties of an office or employment).

In the case of Deverell, Gibson & Hoare Ltd v Rees [1943] 25 TC 467, the company claimed a deduction for the amounts expended in paying a sum to a departing director and for releasing that director from a debt owed to the company.

Owing to differences which arose between Hoare and Packer, the two directors of the company, Packer handed in a letter of resignation, adding:

‘Unless I hear that you want to take over my connection I shall make other arrangements in regard to it.’

Hoare was advised that Packer had no rights over the business connection, which he had brought in on becoming director of the company in 1930. But for business reasons Hoare was anxious that Packer should not leave the company under a sense of grievance. This was stated in evidence that was accepted. Hoare asked Packer what he wanted. Packer asked for £600. Before his resignation took effect, Packer drew up the following minute, which was recorded in the company’s minute book and signed by both Hoare and Packer:

‘It was agreed that the company purchase Mr. Packer’s assets and the sum agreed upon was £450 plus the cancellation of the debt of £150 now appearing as a debt on the balance sheet against him.’

The company claimed a deduction for the £600 in computing its profits. Hoare gave oral evidence before the Commissioners that the company had not purchased any assets from Packer but that it had paid the said sum to placate him and to keep the company from being injured by him. The Special Commissioners refused the company’s claim, holding that Hoare’s motives for signing the minute could not alter the substance of the transaction from that which was naturally to be inferred from the terms of the minute.

The courts held, that it was a fair construction of the minute that the only effective thing done by the agreement was to put Packer under an obligation not to set up business in competition with the company. The deduction claimed was accordingly inadmissible in view of what is now S53 Corporation Tax Act 2009.

For more on the employment income charge for payments in relation to restrictive undertakings, see EIM03600.