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Business Income Manual

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Wholly and exclusively: commencement, cessation or sale of business: payment to effect orderly shut-down of trade

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

Payment to ensure orderly trading and not to close the business is allowable

The decision in CIR v Anglo Brewing Co Ltd [1925] 12 TC 803 (see BIM38310) shows that redundancy costs incurred in closing down the business are not allowable. The decision in CIR v Cosmotron Manufacturing Ltd [1997] 70 TC 292 (see BIM38315) shows that redundancy costs arising out of normal terms of employment are allowable notwithstanding that the occasion of redundancy was the closure of the business.

In the case of O’Keefe v Southport Printers Ltd [1984] 58 TC 88, the company was a member of a group the parent of which was Liverpool Daily Post & Echo Ltd (LDPE). The trade of Southport Printers Ltd (Southport) was unprofitable. Its directors recommended to LDPE that it should be closed down. It was clear that the unions would be unlikely to allow an orderly closure if only statutory and contractual obligations to employees were met.

Southport’s directors recommended to LDPE that LDPE should pay a further £80,000 to Southport’s employees on closure to protect the businesses of the members of the group. LDPE accepted this recommendation.

A director of Southport reached agreement with the unions that employees would receive the balance of wages due to 31 March (the planned date of closure) as payments in lieu of notice together with redundancy and severance payments, which were in excess of the statutory redundancy payments, and represented the further £80,000. It was also agreed that, although the statutory notice to which certain employees were entitled would not expire until 31 March, closure might be brought forward to a date early in February.

In the event, the date of closure was 10 February, and the personnel manager of LDPE recognised a statutory obligation on Southport to make payments to certain employees ‘in lieu of adequate notice of termination of employment’ totalling £8,085. Southport’s board resolved to pay £30,847 in full discharge of its contractual and statutory liabilities to the work force, comprising:

  1. payments in lieu of notice £8,085, and
  2. redundancy payments £22,762

Each employee received two cheques: one from Southport, the other from LDPE representing the balance of his share of the additional £80,000 agreed with the unions.

One of Southport’s directors was also a director of LDPE. The Crown contended that it was impossible for Southport to separate the purpose of achieving the orderly conduct of its own trade prior to the date of cessation from that of safeguarding the businesses of the other members of the group. Accordingly, the Crown contended that the latter was at least part of Southport’s purpose in making the payments.

The Special Commissioners held that the sum of £8,085 was paid by Southport for the purpose of achieving the orderly conduct of its trade prior to the date of cessation and was merely a measure of its share of the total consideration payable by the group. The payment was accordingly a trading expense, and not precluded by what is nowS54(1)(a) Corporation Tax Act 2009, from deduction in computing Southport’s profits.

The Commissioners found that:

  1. Southport’s liability to make payments in lieu of notice was to be treated as merely the measure of its contribution to the overall payment and £8,085 had been paid for the purpose of achieving the orderly conduct of Southport’s trade up to cessation, and
  2. this was the only purpose of the payment

The High Court dismissed the Crown’s appeal.

Nourse J said that he could only overturn the Commissioners if there was no evidence to support the conclusion that they had reached. Nourse J went on to explain that the Commissioners had had the advantage of hearing first hand evidence from the directors involved in the decision making process. Nourse J had no doubt that that is the only way in which a tribunal could arrive at a proper appreciation of the state of play with the unions at the material time and of the effect which it had on the thinking of the directors of any of the companies concerned. That evidence led the Commissioners to conclude, in effect, that whatever the company had paid, whether £8,085 or more or less, and under whatever label, it would have been made wholly and exclusively for the purpose of achieving the orderly conduct of its own business prior to the date of cessation. Nourse J found that there was nothing to lead him to overturn the Commissioners.

The decision may be contrasted to that in CIR v Anglo Brewing Co Ltd [1925] 12 TC 803 (see BIM38310). The payment in Southport was to ensure orderly trading and not to close the business.

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

`On the basis of the evidence before the Commissioners, Mr Carnwath [Counsel for the Crown] submits, first, that part at least of the company’s overall purpose in paying the £8,085 was to meet its contractual and statutory liabilities incidental to the cessation of its trade; and, secondly, that it was in any event at least part of the company’s purpose to safeguard the businesses of other companies in the group. Further, he says that there was no evidence to support the contrary finding. I do not have to say, on the facts as they appear to me from the material which is before this Court, that I would have come to the same conclusion as the Commissioners. It never comes amiss for the Court to emphasise that the consequence of the principle of Edwards v Bairstow & Harrison [1955] 36 TC 207, see BIM37045] is that its function in a case of this kind is not to conduct a rehearing. It can only interfere if it thinks that there was no evidence to support the conclusion of the Commissioners. It does not seem to me that I could possibly go that far in the present case. There was certainly some documentary evidence to support the conclusion… Far more important, in my view, is the fact that the Commissioners saw and heard Mr Powell and Mr Clarke, [directors] an advantage denied to me. There can be no doubt that that is the only way in which a tribunal could arrive at a proper appreciation of the state of play with the unions at the material time and of the effect which it had on the thinking of the directors of any of the companies concerned. That evidence led the Commissioners to conclude, in effect, that whatever the company had paid, whether £8,085 or more or less, and under whatever label, it would have been made wholly and exclusively for the purpose of achieving the orderly conduct of its own business prior to the date of cessation. I do not find myself able to say that it was not open to them on the evidence to treat the amount of the company’s contractual and statutory liabilities merely as a measure of its contribution to the overall payment.

That is really an end of the first of Mr Carnwath’s two submissions. At first sight, the second is perhaps the more formidable. Mr Carnwath says that it would have been impossible for the company in a situation of this nature, particularly in the light of the dual role of Mr Clarke and the mutual interests of all the companies concerned, to separate the purpose of achieving the orderly conduct of its own business prior to the date of cessation from that of safeguarding the businesses of the other members of the group. Accordingly, he says that I must assume that the latter was at least part of the company’s purpose in making the payments. In this connection he relied on the observations of Walton J in Garforth v Tankard Carpets Ltd [[1980] 53 TC 342 at pages 257 to 258,see BIM38210], and in Watney Combe Reid & Co Ltd v Pike [[1982] 57 TC 372 at pages 750 to 751, see BIM35545]. Those decisions were not cited to the Commissioners, no doubt because the principle is well established. However, the principle does not raise an irrebuttable presumption. It is clear from para 27 of the decision that the Crown argued that the company’s payments must have been made partly for the benefit of other companies in the group. In spite of that argument the Commissioners found that the company did have its own separate purpose in making the payments. I cannot say that there was no evidence to support that finding. Indeed, earlier in para 27 the Commissioners, in the sentence which I have already quoted, expressly state that there was evidence to that effect. That is not in itself very specific, but the evidence must have come from Mr Powell and Mr Clarke, or one of them. It is not for me to say that the Commissioners could not accept it, particularly in a proceeding where I am denied a sight of a transcript of the cross-examination of those witnesses.’