Income Tax - Trading Income

Question 1

Eg Abbot v Albion Greyhounds (Salford) Ltd 1945 1 All ER 308.
(Receipts from disposal of an Asset)

Answer 1

 The trade of the taxpayers was racing greyhounds.
 When the greyhounds got too old to race any more they were sold on as pets.
 The owner tried to claim that the greyhounds were part of their trading assets (as the advantage of that would be that the loss on sale would come under profit/loss account.
 Court held, that the greyhounds were part of the capital structure. The greyhounds were the ‘tree’ that allowed the fruits to be generated (winnings).
 (the greyhound owners were not in the business of rearing and selling greyhounds, they were in the business of racing them so they were capital goods.)

Question 2

Mallett v Staveley Coal and Iron Co Ltd [1928] 2 KB 405

Payment to get rid of Capital Asset

Answer 2

 Company paid a landowner rent for a mineral lease.
 Mining company later felt that the lease was no longer worth the value so terminated the contract.
 They paid damages to the landowner.
 Court held that these damages paid were a capital payment. The damages are sums paid in respect of the company’s fixed capital and not payments made for the purposes of its trade of winning and selling coal.
 HELD, Payment to get out of unprofitable mineral leases was a capital payment so not deductible for income tax purposes

Question 3

*Lawson v Johnson Matthey plc [1992] STC 466 (HL)

Payment to get rid of Capital Asset

Answer 3

 Johnson Matthey is successful british finance company which used to have a wholly owned subsidiary bank.
 Bank was in serious financial difficulties and parent company was concerned that it could bring down the whole parent group.
 Bank of England were also worried that it would bring down the whole baking sector.
 The Bank of England agreed to buy shares from the parent group for £1, provided that Johnson Matthey invest £50 million into the bank before the Bank of England became the 100% stakeholder.
 **The capital asset in this case was the 100% stakeholder in the company.
 There was no doubt that the bank was the capital asset of the parent group.
 First two courts held the payment would not be treated as a deductible payment in the computation of trading profits as it was done to get rid of a capital asset.
 HOL overruled this.
 HELD that the payment of the £50 million was to protect the taxpayer’s own trade. It was a payment to get rid of an obstacle of trading, Getting rid pf a capital asset was only a bi-product.
 ***important in this case that the motive was held to only partially be about getting rid of a capital asset. It was more importantly about getting rid of an obstacle to trade.

Question 4

Mallalieu v Drummond [1983] STC 665 – clothes

Wholly and Exclusively

Answer 4

 Tax payer was a barrister appearing in the HOL
 There was no specific uniform when appearing in the HOL but one must dress specifically in black and white.
 Barrister went out and bought clothes for this purpose.
 Tried to claim the clothes she bought as trading expenditure, as she claimed she only wore them in the HOL.
 HELD, she could not claim trading expenditure
 The Judges said there was not just the conscious motive to take into account, she must have had subconscious motive to get clothes for warmth and decency.

Question 5

Newsom v Robertson [1952] 2 All ER 728

Wholly and Exclusively

Answer 5

 A barrister practising in London had at his house at Whipsnade a study where he kept a number of law reports and textbooks, and where he would work at night after return from chambers; he would also do almost all his work in that study during the vacations.
 Held, his expenses of travelling to and fro between his home and his chambers could not qualify for tax purposes as permissible deductions from his gross earnings as a barrister because they were not incurred “wholly and exclusively” for the purposes of his profession within the meaning of r.3(a) of the rules applicable to Cases I and II of Sch.D; the appellant’s purpose in making the journeys was to get home in the evenings or at week-ends and the fact that he intended to do professional work when he got there, and did so, did not make this even a subsidiary “purpose” of his profession.