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HMRC internal manual

Business Income Manual

Wholly and exclusively: companies: helping a subsidiary

S54 Corporation Tax Act 2009 (CTA 2009)

For whose trade purpose?

Note that for companies chargeable to Corporation Tax, the tax treatment of loans and advances to a subsidiary company is governed exclusively by the loan relationships regime in Parts 5 and 6 CTA 2009. Detailed guidance is at CFM30000.

Expenditure incurred by a company wholly and exclusively for the purposes of its trade is allowable notwithstanding that a benefit may accrue to a third party (including a fellow group member or associated company). The purpose is essentially a question of fact.

The evidence of the directors as to purpose will be important but you should bear in mind Walton J’s remarks in the Tankard Carpet case mentioned at BIM37065. Where the directors are common to both companies it takes a superhuman effort of mind to distinguish the purposes of one company from those of the other. The Tribunal should be slow to accept that such an act was done solely for the benefit of one company’s trade. They should do so only where there are wholly separate findings of primary fact not depending on the say-so of the directors concerned.

In the case of Robinson v Scott Bader Co Ltd [1981] 54TC757 (see also BIM37065) the company manufactured and marketed chemical intermediates and synthetic resins for the making of fibreglass. The company provided its synthetics as raw materials for its subsidiary company, associated companies, licensees and other customers for their manufacturing trades. The company had one wholly owned subsidiary company incorporated in England, two partly-owned associated companies in Sweden and Germany, and a wholly-owned subsidiary incorporated in France, known as Scott Bader Societe Anonyme (SBS).

Originally, the company held only a 50% interest in SBS but, in 1975, having reviewed its operations in Europe and the profitability of SBS, the company acquired the other 50% interest. Following the departure of the former managing director, the company seconded one of its own employees, Mr Fearon, to act as manager of SBS and provide it with necessary technical and marketing expertise. The company paid Fearon’s salary, expenses and social costs while he was on secondment in France.

The company claimed the sum paid to Mr Fearon as a deduction in computing the profits of its trade on the basis that its business and trading were international in concept and execution through (amongst other things) SBS. The General Commissioners decided that the company and SBS contributed to and were dependent upon an ‘international unitary business’, the nature of which included marketing and the extension of markets, and thus the deduction was allowable.

In the High Court, the Crown contended that the expense was not exclusively incurred for the purposes of the company’s trade but to protect its investment in SBS for the benefit of the trade of SBS. The Crown also contended that the deduction was disallowed by what is now S54(1)(b) CTA 2009, and/or was a capital sum excluded by what is now S53 CTA 2009.

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

’…where a parent company affords financial or other assistance, of whatever nature, to a subsidiary company, there are three possible situations:

    1. the parent company is providing such assistance solely in the interests of the subsidiary company;
      1. the parent company is providing such assistance partly in the interests of the subsidiary company and partly in its own interests, and
      2. the parent company is providing such assistance solely in its own interests.’

In situations (i) and (ii) the relevant expenditure is not deductible; but in (iii) deduction is permissible and (applying Bentleys, Stokes & Lowless v Beeson [1952] 33 TC 491, 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?’

The Commissioners had found that the position of SBS:

‘vis-a-vis the Respondent was unique, the rescue operation being undertaken to further the Respondent’s business in France and in Europe’

and that finding could not be upset. Payment of Mr Fearon’s wages did not come within either what is now S54(1)(b) CTA 2009 nor could it be regarded as a capital sum.

The Court of Appeal unanimously dismissed the Crown’s appeal. The decision in Edwards v Bairstow & Harrison [1955] 36 TC 207 applied (see BIM37045). Furthermore, it was quite impossible to say that the payment could be regarded as a capital sum within what is now S53(1) CTA 2009.

Waller LJ in the Court of Appeal explained that ’purpose’ in what is now S54(1)(a) CTA 2009 contains an ingredient of ’intention’ (see BIM37065). It is very difficult, but perhaps not impossible, to determine this without some element of subjectivity. In many cases the test will be wholly subjective. In considering the purposes of a company there may be room for some objectivity, but it will normally be to assist in making the subjective decision.

Waller LJ went on to explain that the fact that the French subsidiary benefited from the expenditure did not matter if the company’s purpose in sending Mr Fearon to France was wholly and exclusively for the purposes of its own trade, saying at page 772:

`The inevitable result of sending Mr Fearon, at the taxpayer’s expense, to France would be to improve the running of the French company and no doubt this would improve that company’s financial position. But it does not follow that that was the real purpose of making the payments. It was one of the results, albeit it may well be an inevitable result. It was vis-a-vis the company in much the same position as the provision of lunch by the solicitor in the case referred to above (Bentleys, Stokes & Lowless v Beeson [1952] 33 TC 491).’