In HMRC v P Vaines [2016] UKUT 2 (28 January 2016), the UT overturned the FTT’s decision, finding that a payment, made by a partner in a law firm to a bank in order to avoid bankruptcy, was not deductible.
This was an appeal of the FTT’s decision allowing Mr Vaines’s claim to deduct a payment of €300,000 to Bayerische Landesbank, on the basis that it had been incurred wholly and exclusively for the purposes of his trade. He had made this payment as full settlement of his share of a claim the bank had against a law firm (Haarmann Hemmelrath), in which he had been a partner and which had ceased trading.
The UT first observed that Mr Vaines must justify the deduction of his payment in the context of the partnership’s trade conducted collectively. The payment had not been borne by Mr Vaines’ (then) new law firm, Squire Sanders & Dempsey (SS&D), and there was no suggestion that Mr Vaines’ decision to pay €300,000 to Bayerische Landesbank had been discussed with its other members. Indeed, SS&D had lent him the funds; it was therefore clear that it had declined to take any responsibility for the payment. The UT concluded that Mr Vaines had made the payment to avoid bankruptcy, which would have cost him his partnership in SS&D. It was therefore not possible to conclude that the payment had been made wholly and exclusively for the purpose of SS&D’s trade.
Why it matters: The UT accepted that a payment to preserve the trade from destruction can properly be treated as wholly and exclusively expended for the purposes of the trade. However, the fact that a payment is made to preserve the trade from destruction does not mean that it is wholly and exclusively incurred for the purposes of the trade. Mr Vaines’ payment inevitably resolved what was a personal matter (in relation to his membership of SS&D), and this was not just an incidental effect of his decision to protect his professional career. The payment was therefore not incurred wholly and exclusively for the purpose of his trade.
In HMRC v P Vaines [2016] UKUT 2 (28 January 2016), the UT overturned the FTT’s decision, finding that a payment, made by a partner in a law firm to a bank in order to avoid bankruptcy, was not deductible.
This was an appeal of the FTT’s decision allowing Mr Vaines’s claim to deduct a payment of €300,000 to Bayerische Landesbank, on the basis that it had been incurred wholly and exclusively for the purposes of his trade. He had made this payment as full settlement of his share of a claim the bank had against a law firm (Haarmann Hemmelrath), in which he had been a partner and which had ceased trading.
The UT first observed that Mr Vaines must justify the deduction of his payment in the context of the partnership’s trade conducted collectively. The payment had not been borne by Mr Vaines’ (then) new law firm, Squire Sanders & Dempsey (SS&D), and there was no suggestion that Mr Vaines’ decision to pay €300,000 to Bayerische Landesbank had been discussed with its other members. Indeed, SS&D had lent him the funds; it was therefore clear that it had declined to take any responsibility for the payment. The UT concluded that Mr Vaines had made the payment to avoid bankruptcy, which would have cost him his partnership in SS&D. It was therefore not possible to conclude that the payment had been made wholly and exclusively for the purpose of SS&D’s trade.
Why it matters: The UT accepted that a payment to preserve the trade from destruction can properly be treated as wholly and exclusively expended for the purposes of the trade. However, the fact that a payment is made to preserve the trade from destruction does not mean that it is wholly and exclusively incurred for the purposes of the trade. Mr Vaines’ payment inevitably resolved what was a personal matter (in relation to his membership of SS&D), and this was not just an incidental effect of his decision to protect his professional career. The payment was therefore not incurred wholly and exclusively for the purpose of his trade.
