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HMRC internal manual

Business Income Manual

Wholly and exclusively: commencement, cessation or sale of business: cost of meeting former owner's obligations

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

What matters is the purpose of the payment

Where a payment is wholly and exclusively for the purposes of the trade it does not matter if the payment discharges someone else’s legal obligation.

In the case of Cooke v Quick Shoe Repair Service [1949] 30 TC 460, the taxpayer purchased a shoe repair trade and, as a condition of purchase, required the vendor to discharge all liabilities outstanding at the date of sale.

The vendor failed to do so and, to preserve supplier goodwill and ensure continuity of supplies, the taxpayer paid certain sums in discharge of the vendor’s obligations. The taxpayer sought a deduction for the amounts paid against their income for the initial period of trading. The Commissioners allowed the deduction.

The High Court also allowed the deduction taking the view that it was a question of fact for the Commissioners to decide if the purpose of the expenditure was wholly and exclusively for the purpose of the trade.

Croom-Johnson J said that the expenditure was to preserve the company’s assets and, following Southern v Borax Consolidated [1940] 23 TC 597, see BIM35540), was allowable as a deduction from trading profits.

As part of the judgment, Croom-Johnson J also considered and dismissed the Crown’s argument that the payment was capital. For a discussion of why the payment is a revenue expense, see BIM35540.

If the agreement in Quick Shoe had been different, eg if it had required the purchaser to pay the vendor’s creditors, then such payment would have been part of the capital consideration given for acquisition of the business. See BIM35655.

The part of Croom-Johnson J’s judgment on which the above guidance is based is set out at page 465:

`What is the general rule which ought to be applied? I am looking at this, as I have said, to see whether these Commissioners have misdirected themselves as to what they are to do. Atherton v British Insulated [and Helsby Cables Ltd [1925] 10 TC 155, see BIM35010] was brought to their attention and I have no doubt that they were thinking of it in arriving at their conclusion. Perhaps it is worth reading a few lines from the speech of Lord Cave in the House of Lords, at page 191: “I think it clear that the deduction from the profits of the above- mentioned sum of £31,784 is not prohibited by the [what is now S54(1)(a) Corporation Tax Act 2009] which prohibits the deduction of a disbursement not being money wholly and exclusively laid out or expended for the purposes of the trade. It was made clear in the above cited cases of Usher’s Wiltshire Brewery v Bruce [[1914] 6 TC 399, see BIM37200]and Smith v Incorporated Council of Law Reporting[[1914] 6 TC 477] that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency” and in order indirectly, to facilitate the carrying on of the business, may “yet be expended wholly and exclusively for the purposes of the trade”.

It appears to me that the findings of the Commissioners in the present case bring the payment in question within that direction. I need not cite passages from the speeches of the other noble and learned Lords who came to the conclusion that they did come to in that particular case, but, applying that test here, it seems to me that I cannot say that there has been any misdirection by these Commissioners in point of law.

The cases show that, if money is expended with a view to preserving an asset, the result of it is, once the Commissioners are satisfied of that circumstance, it may be a deductible expenditure. That seems to be established by, amongst other cases, the case of Southern v Borax Consolidated, Ltd [[1940] 23 TC 597, see BIM35540], at page 603.’