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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 director for changing duties because of ill-health

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

‘Normal’ employment costs are allowable

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 (which taxes the recipient of certain payments arising in connection with the termination or change in the duties of an office or employment). For more on the taxation of termination payments, see EIM12800 onwards.

In the case of Wilson v Nicholson Sons & Daniels Ltd [1943] 25 TC 473, the courts considered the deductibility of an amount paid to a director following a change of duties consequent upon ill health.

The company was formed on 15 March 1935, to take over a business which had up to that time been carried on by a private company - a family business mainly directed by Sir Percy Daniels. All the shares but one in the new company were held by Sir Percy Daniels, either in his own right or on behalf of the trustees of a family settlement.

Under the company’s articles of association Sir Percy Daniels was appointed a director for life. Sir Percy Daniels was appointed to act as chairman and governing and managing director for life. His remuneration was to be £3,000 per annum unless otherwise agreed between himself and the company.

The company’s share capital was increased and Sir Percy Daniels, although still in control of the company, was no longer the beneficial owner of a large part of the share capital. Following the share issue, Sir Percy Daniels’ salary was increased to £15,000 per annum.

In 1937, Sir Percy Daniels’ health became so impaired that he was no longer able to devote as much time and attention to the company’s business as formerly. The company and Sir Percy Daniels agreed that:

  • he should resign from the offices of chairman and governing and managing director
  • the company should pay him £75,000 in consideration of the cancellation of the agreement and by way of compensation for the loss of his offices and the cessation of his remuneration, and
  • should appoint him as an advisory director during his life at £1,000 per annum

The company claimed that the £75,000 paid to Sir Percy Daniels was deductible in computing its trading profits for tax purposes. (Note that Sir Percy Daniels also appealed against an assessment made upon him under Schedule E (what is now the charge to employment income) in respect of the £75,000, contending that the said sum was not remuneration but compensation for loss of office.)

The Special Commissioners decided, following the case of Anglo-Persian Oil Co Ltd v Dale [1931] 16 TC 253 (see BIM35505), that the sum of £75,000 was an admissible deduction in computing the company’s profits. (The Special Commissioners also decided that the payment in question was a payment of compensation by the company for depriving Sir Percy Daniels of the office which he was entitled to hold for life, and was not assessable under Schedule E.)

The courts held that the £75,000 was an admissible deduction in computing the company’s profits for tax purposes (and that the £75,000 was assessable under Schedule E on Sir Percy Daniels).

The costs of hiring and firing staff are generally allowable - see for example Mitchell v Noble [1927] 11 TC 372. See BIM38370.