Littlewoods Mail Order Stores Ltd. versus IRC [1969] 1 W.L.R. 1241, 1254

If it appears that a company has been created solely for tax evasion and to avoid tax liabilities, then the Court must lift the corporate veil to see that the person responsible for such evasion is held accountable as such.
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Introduction

This case of Littlewoods Mail Order Stores Ltd. versus IRC is concerned with the concept of piercing the veil under the UK Company law. The concept of piercing the veil means that the corporate identity is segregated from the identity of its directors. This corporate identity is often used by the directors as a means to ensure that their wrongdoings are protected under the umbrella of the corporate identity. The corporate identity usually protects the directors from being personally liable, but often at times, when the wrongdoings of the company’s directors become too obvious to ignore, the Court may resort to piercing the corporate veil i.e. lift the protection of distinct corporate identity and hold the directors directly and personally accountable for the wrongdoings done by them. This case was also concerned with the issue of piercing the veil and held the directors liable for the wrongdoing done by them.

Facts

A store was owned by Littlewoods Mail Order Stores Ltd. (hereinafter referred as ‘Littlewoods’) in Jubilee House in Oxford Street. The premises on which the store was built was on lease for 23,444 pounds every year, and the duration of the lease was 99 years. The lease was taken by Littlewoods from a charity which was under the name Odd fellows Friendly Society (hereinafter referred as ‘Odd fellows’) . After 11 years, the value of money downgraded and the lease agreement became detrimental to the Charity, at mere 23,444 pounds a year, whereas any other property was not less than 60,000 pounds a year.

Due to the change of situation in 11 years, both Littlewood and the Odd fellows tried to negotiate the lease agreement so that the same may be beneficial to both of them. After the conclusion of negotiation, the two parties arrived at a solution which was designed to benefit both Littlewoods and Odd fellows. As per the negotiation, Odd fellows transferred the freehold that it had in Jubilee House to Fork Manufacturing Co. Ltd. (hereinafter referred as ‘Fork Company’), a wholly-owned subsidiary of Littlewoods. Fork Company lent Jubilee House to Odd fellows for 22 years and 10 days at a rent of £6 pa. Odd fellows granted an under lease to Littlewoods for 22 years at a rent of £42,450 pa. The ultimate result was that Littlewoods gave up their lease for 88 years at a rent of £23,444 and instead took a lease from the Odd fellows for 22 years at £42,450. Additionally, Littlewoods, through its wholly-owned subsidiary, Fork Company, at the end of the 22 years, would have the entire freehold possession. Littlewoods was contending that the whole rent of £42,450 was deductible as an expense for trade under Section 137 of the Income Tax Act, 1952. The Commissioners rejected this contention.

Issues

Whether the whole rent of £42,450 was deductible as an expense for the purpose of trade under Section 137 of the Income Tax Act, 1952?

Held

The Courts held that Fork Company’s interposition made no difference to the real nature of the payments.The transfers were not ‘money wholly and exclusively laid out’ for trade and not deductible. For annual expenditure, the courts must look at the true nature of the transaction. The Courts reiterated the principle laid down in the case of Salomon v. Salomon and held that the Fork Company should be viewed in its true nature, that it is only a wholly-owned subsidiary of the Littlewoods. The Courts averred that it should be treated as a puppet of Littlewoods, and that it should be treated as such both in points of fact and point of law.

Analysis

The Appeals Court in Littlewoods Mail Order Stores Ltd. versus IRC unanimously agreed that the wholly-owned subsidiary, i.e. Fork Company in this case, was not a separate legal entity, under the garb of which Littlewoods could claim relevant tax exemptions. The Court applied the concept of piercing the veil and held that the two companies were not distinct entities, but rather, only a puppet and puppeteer. This did not exclude the Littlewoods from paying the relevant taxes under the garb of distinct legal identity.

Conclusion

The Courts concluded with their decision in this case that if it appears that a company has been created solely for tax evasion and to avoid tax liabilities, then the Court must lift the corporate veil to see that the person responsible for such evasion is held accountable as such.

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