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HMRC internal manual

Business Income Manual

Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: to secure sale of subsidiary?

Cash injected into subsidiary as condition for rescue purchase by Bank of England

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.

The purpose for which money is expended (other than in that class of cases where there is an intrinsic duality of purpose - see BIM37900) turns very much on the specific facts in each individual case. At the margin, those facts need to be established and examined with particular care.

In the case of Lawson v Johnson Matthey plc [1992] 65TC39, Johnson Matthey Bankers Limited (JMB), a wholly owned subsidiary of the company (PLC), carried on the business of banking and bullion and currency trading. PLC carried on the business of refining and marketing precious metals.

During 1984 JMB got into a precarious financial position in its commercial loan business, particularly because of two very large loans which were inadequately secured. At a board meeting of PLC held at the Bank of England (the Bank) during the evening of Sunday 30 September - 1 October 1984 it was concluded that JMB was insolvent and could not open its doors for business the next day without further financing and that the resulting loss of confidence in PLC would cause lending institutions to demand the return of metals held on their behalf and monies owed to them by PLC.

PLC was unable to provide sufficient funds to meet JMB’s requirements nor was it able to meet the likely demands of its own customers (on the collapse of JMB) without further financial support. It was therefore decided to wind up JMB and appoint a receiver for PLC. This decision was communicated to the Bank which made a (non-negotiable) offer to purchase the issued share capital of JMB for £1 provided PLC injected £50m into JMB prior to the sale and agreed to procure the resignation of JMB’s directors and the appointment of such new directors as the Bank would require. The Bank also undertook to provide or arrange a stand-by facility of £250m for PLC. The agreement was implemented by the opening of business on 1 October 1984 thereby enabling PLC to continue trading.

PLC contended that the payment of £50m was an expense of a revenue nature because it was made solely to preserve its own trade from collapse and had achieved this objective. It further contended that the payment was made wholly and exclusively for the purpose of its trade. Alternatively, it argued, if only part of the sum was paid for the purposes of PLC’s trade, there should be an apportionment.

The Crown argued that the payment was of a capital nature because it was made in connection with and as a condition of the disposal of the shares which were a fixed capital asset and because it was made to free PLC from liabilities of a capital nature relating to the business of JMB. Further, the payment was not made wholly and exclusively for the purposes of PLC’s trade because its purpose was (amongst other things) to rescue JMB and to preserve the businesses and goodwill of the other members of the Johnson Matthey Group. In addition, where expenditure was incurred for a dual purpose no apportionment was possible.

The Commissioners upheld PLC’s contentions. The Crown appealed, but did not pursue the contention that the payment had not been made wholly and exclusively for the purposes of PLC’s trade.

The High Court held, allowing the Crown’s appeal, that:

The Bank was only willing to provide support if it gained control of JMB by acquiring the shares and gaining the right to remove and appoint JMB’s directors and if JMB was rendered less unattractive by the injection into it of £50m.

  1. Whilst PLC’s purpose in making the payment was to preserve its business, the means by which that purpose was achieved was to transfer its shares in JMB and, as part of a single transaction, to inject £50m into JMB.
  2. The two elements could not be severed, the one being treated as the disposal for a nominal consideration of a worthless but not onerous (capital) asset and the other as a (revenue) payment to preserve the business of PLC.

PLC appealed.

The Court of Appeal, dismissing PLC’s appeal, held that the £50m was capital expenditure. The nature of the rescue operation was that a single agreement was made by which the Bank acquired the shares in JMB for a nominal sum upon terms that PLC provided the £50m to JMB. PLC’s purpose was to preserve its own trade, but that was not determinative of the capital/income issue. PLC made the payment to enable it to get rid of a capital asset, the continued retention of which would have been harmful to PLC.

PLC appealed.

The House of Lords held, allowing PLC’s appeal, that the £50m payment was a revenue payment, and wholly and exclusively incurred for the purpose of PLC’s trade. It was paid as a contribution towards the rescue operation of the Bank. PLC made the payment to save its own platinum trade from collapse and to be able to continue in business. The payment was not made to persuade the Bank to take the worthless shares and could not be described as money paid for the divestiture of those shares.

Lord Goff of Chieveley (with whom Lord Keith of Kinkel and Lord Emslie agreed) concluded that the payment did not become a revenue payment simply because PLC paid the money with the purpose of preserving its platinum trade from collapse; the question was rather whether, on a true analysis of the transaction, the payment was to be characterised as of a capital nature. Here that did not depend on PLC’s motive or purpose, but depended on whether the sum was paid for the disposal of a capital asset.

For an explanation why the expenditure was not capital, see BIM35000 onwards.