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Profits Tax -  Excessive remuneration

In the case re Stanley So & Company, it was held that certain entertainment expenses, equipment rental and office facilities charges are disallowed because they are regarded as excessive and not in the production of chargeable profits. In such cases, the IRD can make appropriate adjustments when computing the assessable profits. Click here for details.

In the case Copeman versus V, William Flood & Sons Ltd. 24 TC 53, large remunerations were paid to the relatives of the directors who worked in the company. The Revenue challenged that the payments were excessive and therefore should be disallowed. It was ruled that the court could not interfere with the company's right to pay whatever remuneration they liked; this was not the point; and the point was whether such payments were incurred for the purpose of the trade.

Click here for more on Excessive Remuneration paid to Director

RYTC's comments:

The crucial question is not whether the remuneration is excessive or value for money. The question is to what extent it is incurred for the production of chargeable profits. As the Revenue cannot set a reasonable market price for the work remuneration, it will be inclined to take a liberal view in this respect unless the remuneration paid to a closely-connected person is unreasonably high and incommensurate  with his age, experience, qualifications and work duties. If the remuneration is very unreasonable, the Revenue may invoke anti-avoidance legislations to deny the deduction or invoke the tax principle in Stanley So case to restrict the deduction to a commercially realistic level..

 

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