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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: remuneration, etc: 'excessive' remuneration: disallow the excess

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

Look for arm’s length comparators as a measure of remuneration that is wholly and exclusively for the purposes of the trade

Remuneration that is paid in whole or in part for purposes other than those of the trade, profession or vocation is not allowable.

Whether and to what extent remuneration was excessive was considered in the case of Earlspring Properties Ltd v Guest [1995] 67 TC 259.

Earlspring Properties Ltd was a property investment company the shares in which were owned by Mrs Conchita Broomfield. Some time after the marriage of John Harry Broomfield and Mrs Conchita Broomfield in 1978, the company’s activities were enlarged to include the property consultancy part of a business carried on by John Harry Broomfield’s firm.

The consultancy work was carried out by the firm on behalf of Earlspring Properties Ltd.

The firm also collected rents from Earlspring Properties Ltd’s investment properties and paid them into Earlspring Properties Ltd’s bank account. Earlspring Properties Ltd had no premises and no staff. Mrs Conchita Broomfield was not involved in its consultancy work and only did necessary clerical work. In the early years, Mrs Conchita Broomfield’s remuneration was £1,000 but, for the periods ended in 1983 to 1988, it was in sums varying between £21,359 and £38,777, with Earlspring Properties Ltd also paying £20,000 or £21,000 as an annual contribution to a pension fund for Mrs Conchita Broomfield’s benefit.

Various aspects of the company’s affairs were investigated by the Revenue. The main issue in the case concerned liability in respect of loans to participators under what is now S455 Corporation Tax Act (CTA 2010) and reporting requirements under what is now Sch18 Para3 Finance Act 1998. For more information on S455 CTA 2010, see CTM61500 onwards.

In addition to these issues, Corporation Tax assessments for the accounting periods ended in 1983 to 1988 were raised on the footing that the remuneration paid to Mrs Conchita Broomfield during those years was not money laid out wholly or exclusively for the purposes of the company’s trade within what is now S54 Corporation Tax Act 2009.

Earlspring Properties Ltd’s appeals against those assessments were dismissed by the General Commissioners who held that the amount allowable as a deduction for director’s remuneration should be limited to 5% of the taxable profits for each year. The company appealed. The High Court dismissed the appeal, concluding that the wife’s remuneration was not wholly and exclusively for the purposes of the trade. Vinelott J said:

‘In my judgment, bearing in mind the very large leap in salary from £1,000 in the accounting period to 31 March 1982 to £31,488 in the accounting period to 31 March 1983, the fiscal advantages in the diversion of earned income to Mrs Broomfield (which would not be aggregated with Mr Broomfield’s income) and the facility the remuneration afforded her of enabling large premiums to be paid into a pension fund for her benefit, the commissioners were plainly entitled to conclude that the remuneration was not wholly and exclusively incurred for the purpose of the taxpayer company’s business but represented in part a diversion of income made to achieve a fiscal purpose. Indeed, it would, I think, have been surprising or even perverse if the commissioners had reached any other conclusion. Given that the whole of the remuneration was not money wholly and exclusively laid out for the purpose of the taxpayer company’s business, it was for the commissioners to determine as a fact how much, if any, of the remuneration paid could be treated as so laid out.’