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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: remuneration, etc: premium to secure directors’ pension

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

Money laid out by directors for their own benefit not for the purposes of the company’s trade

The expenditure incurred by a company in remunerating its employees and directors (including the costs of ‘benefits in kind’) is normally allowable. This is because the expenditure is usually incurred wholly and exclusively for the purposes of the trade and is not capital. But this might not be the case in all situations and so you may need to consider the payer’s purpose.

In the case of Samuel Dracup & Sons Ltd v Dakin [1957] 37 TC 377, the company had introduced a pension scheme for employees in 1950, and later extended it to a director who held only one share in the company. Following his premature death in 1954, the company made pension arrangements by means of endowment assurance policies for its two remaining directors, who had been controlling directors until 1953, when in anticipation of Estate Duty (the precurser to Inheritance Tax) they transferred part of their holdings to or on trusts for members of their families.

The company claimed that £817 in respect of the premiums on these policies should be deducted in computing its trading profits as money wholly and exclusively expended for the purposes of its business. The General Commissioners found that the premiums were not a proper business expense and dismissed the appeal.

The High Court found that the Commissioners were amply entitled to come to their conclusion. The expenditure was not deductible. Harman J supported the view that the directors had laid out the money to benefit themselves. There was no finding of fact that the money was expended for the purposes of the company’s trade. So the expenditure did not satisfy what is now S54 Corporation Tax Act 2009.

The part of Harman J’s judgment on which the above guidance is based is set out below:

`…I am asked to say that on the facts as set out in the Case, and I agree with Mr Borneman [counsel for the company] that I must limit myself to those and to the proper inferences drawn from them; and, says he: Well, look at what the Commissioners accepted about these premiums. The first thing was that the Company was advised by its insurance broker that the pension scheme - that is a pension scheme they had for employees and for a working director having no interest in the Company - should be extended to include the two permanent directors. The reason that he gave for that advice was that the Company might at a future date, when those directors were ageing, be freed from the burden of paying them either remuneration or pensions out of its own resources. The Commissioners accepted that that advice was given. Whether or not it is good advice I am given no clue. They also accepted this evidence, that one of the permanent directors for whose benefit the policies were taken out said this:

“…that the premature death of Mr Dodd brought home to the Company…”

-Whom did he mean by “the Company” there? He means its directors; that is to say, himself and his cousin -

“…the desirability of making present provision for the families of the directors…”

-that is, their own families -

“…in the event of the death of either of them and the advantages to the Company of making that provision through an approved superannuation Scheme”.

If you could make the provision and set it off against the profits of the Company, of course it was an advantage. Then it goes on:

“…that the pension scheme generally was an inducement to employees to remain in the employ of the Company, and that it was also in the interest of the Company to retain the services of the directors”

-that is to say, the witness and his cousin. In other words, he gave himself and his cousin a pat on the back and said what good directors they were.

The Commissioners appear to have agreed that they probably were very good directors. But there is no suggestion anywhere in the Case Stated, or in the evidence which was given to the Commissioners, that the reason for taking, out these policies, was because otherwise the directors would resign and leave the business of the Company in the lurch. There is not any suggestion that either of them threatened to leave. The only suggestion is that it occurred to them that if they could have the insurance policies on their own behalf which did not cost them anything, it would be very nice for them; I dare say it would; money paid out by the Company which they controlled. Under those circumstances it passes my comprehension that business men who have to review those activities are not entitled to say this is not a proper business expense; in other words. You were laying out this money for your own advantage and not for that of the Company, or, at any rate, your own advantage came into it. If the Commissioners took that view, it seems that they were amply entitled to do so and, even if I did not agree with it, which I do, I should be quite powerless to review it here. In consequence, I shall dismiss this appeal.’