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HMRC internal manual

Business Income Manual

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Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: to allow subsidiaries to meet their obligations

If ‘duality’ of purpose - non-allowable

For companies chargeable to Corporation Tax, the tax treatment of loans and advances is now governed exclusively by the loan relationships regime in Parts 5 and 6 Corporation Tax Act 2009. Detailed guidance is at CFM30000. The guidance below remains relevant to the extent that it does not relate to transactions within the loan relationships regime.

Transactions between parent and subsidiary companies may cause problems. A number have come before the courts. The issues involved are illustrated in two cases, Odhams Press Ltd and Marshall Richards Machine Co Ltd.

You need to establish the purpose of the payment(s) made. As explained in Scott Bader (see BIM38250) there are essentially three possibilities:

(1) it is providing such assistance solely in the interests of the subsidiary;

(2) it is providing such assistance partly in the interests of the subsidiary and partly in 3.

(3) its own interests; and

it is providing such assistance solely in its own interests.

In situations (1) and (2) the relevant expenditure is not deductible; but in (3) deduction is permissible and (applying Bentleys, Stokes & Lowless v Beeson [1952] 33TC491 - see BIM37400) notwithstanding the fact that the subsidiary receives a benefit. The relevant question is ‘what was the object of the person making the disbursement in making it?’ not ‘what was the effect of the disbursement when made?’

In Odhams Press Ltd v Cook [1940] 23TC233, Odhams did work for a wholly owned subsidiary company. The work was charged at full trade price. Upon discovering that the subsidiary had made a loss for the year, Odhams wrote off the equivalent amount of the sum owing to it on trading account. Odhams claimed that this was an allowable deduction representing either:

  • a reduction in its charge for work done, or
  • a bad debt, or
  • a doubtful debt that ought to be treated as bad.

The Special Commissioners found that the sum was not written off wholly and exclusively for the purposes of Odhams’ trade and was not admissible. The House of Lords decided that the question was one of fact for the Commissioners and that there was ample evidence upon which they could reach the conclusion that they had.

Odhams were interested in the subsidiary both as shareholder and as a printer who did work for it at full trade prices. Odhams would wish the subsidiary to prosper and not be weighed down with debts. The same is true of any company holding shares in another company with which it also has a trading relationship, there being two separate companies and two separate trades, and so a dual relationship.

As explained by Upjohn J in Marshall Richards Machine Co Ltd (see below), 36TC foot of page 525:

‘It is normally a question of fact whether the disbursement in question is laid out wholly and exclusively and for the purposes of the trade of the parent company: or, secondly, whether it is laid out wholly and exclusively for the purposes of the trade of the subsidiary company; or, thirdly, whether it is laid out partly for the one and partly for the other. In the first case the parent company succeeds in getting an allowance; in the other two cases it does not.’

In Marshall Richards Machine Co Ltd v Jewitt [1956] 36TC511, the company wished to sell its machines in the USA. To serve this end the company decided to appoint a representative in the USA. There were a number of difficulties facing a foreign company trading in the USA through an agency. The company determined that its ends could be best served by incorporating a subsidiary company in the USA to employ its proposed representative. A wholly owned subsidiary was duly formed. The UK company entered into an agreement with the US subsidiary to pay it a minimum annual sum towards its operating costs. The agreement provided that such payments, together with anticipated increases, were to be treated as on account of agency commission. In three accounting periods the payments made exceeded the commission due. The UK company claimed that the excess was wholly and exclusively laid out for the purposes of its trade.

The Special Commissioners decided that the sums in question represented amounts paid by way of advance to the US company to enable that company to meet its obligations and that they were not wholly and exclusively laid out for the purposes of the UK parent’s trade. The courts upheld the Commissioners and denied a deduction.

Upjohn J said that the expenditure was not allowable because the Commissioners had found that it had been incurred to allow the American company to meet its obligations, 36TC head of page 526:

‘In this case, in fact, the question depends entirely upon the true construction of the agreement entered into between the companies, and it is perfectly clear from clause (11) that this disbursement is for the operating expenses of the American subsidiary; that is, as the Special Commissioners held, a payment for the purpose of enabling the American company to meet its obligations and continue in existence. That is exactly what the payment was for, and it was not laid out in any sense at all to advance the trade of the parent company. Of course. that was the motive, but it was not the purpose of the payment. In my judgement, the Special Commissioners came to a perfectly right conclusion, and, indeed, they could not have come to any other conclusion.’

It followed that the payments were really advances and Upjohn J went on to explain that Charles Marsden & Sons Ltd v Commissioners of Inland Revenue [1919] 12TC217 (see BIM37760):

‘…make it quite clear that payments of that nature are payments and advances of a capital nature and are not deductible in computing the profits of the parent company for tax purposes. Upon that matter, too, the Special Commissioners came to an entirely correct conclusion…’