Reasonable Business Expense - The Chartered Institute of Taxation

Reasonable Business Expenses: Discussion paperIn the leading judgment, Millet, LJ held that the question of fact to beanswered was not whether the directors sought to obtain a benefit for oneor more group companies, but rather what their particular object was.Once such an object was discovered, its characterisation was a matter forthe Commissioners, not the taxpayer. As such, the directors did not setout to benefit any particular company (the ‘effect’) in the group, but rathersought to eliminate an onerous liability detrimental to the group owedlegally only by the taxpayer company (the ‘purpose’). Hence, theexpenditure was laid out exclusively to serve the purposes of thetaxpayer company’s trade, irrespective of any consequential, beneficialeffects this would have on the group’s fortunes, and should bedeductible.Other decisions, however, have denied deductions. In Commercial UnionAssurance Co plc v Shaw, 162 the High Court upheld the Commissioners’decision to disallow the deduction of interest paid on certain loans, asthis was partly to benefit the separate trades carried on by the subsidiarycompanies in the group (of insurance companies) and, therefore, was notwholly and exclusively for the benefit of the parent company. Similarly, inGarforth (Inspector of Taxes) v Tankard Carpets Ltd 163 , theCommissioners held that payments made under certain guarantees by asubsidiary of the associated company of the taxpayer company weredeductible, despite their finding of fact that the interests of the threecompanies in the group were considered when deciding on the paymentsand related security. On appeal, it was held that the payments were notproperly deductible as they were not incurred wholly and exclusively forthe purpose of the taxpayer company’s trade.The basis for allocating related company charges has also raised162163[1998] STC 385; 72 TC 101.[1980] STC 252; 53 TC 342.Bode OyetundePage 28 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College