The Whisky Tax Cases

During World War II whisky was in short supply. There was even a debate as to whether there should be any production at all, when feeding the population was a more urgent use for cereal. In the end distilling was severely curtailed. A 1939 order from the Ministry of Food forbade the production of grain whiskies in patent stills. For two more years malt whiskies from pot stills were allowed but at ⅓ pre war levels. In 1944 production was allowed again but once more at the level of ⅓ pre war volumes.¹ However the lack of new production was not the immediate supply problem, just a future problem – after all whisky needs to be matured for at least 3 years and so the industry would have been using up interwar stock. Instead it was a matter of policy to constrain the home consumption of whisky and sell more abroad, to earn foreign currency. For the home market, on 1st March 1940 each wholesaler was allowed a percentage of what he had bought in the year up to 29th February 1940. It started of at 41% but by 1948 it was 20%. There was no rationing as such, instead whisky just got more scarce and the market price rose.

There was another constraint on what a whisky company could do: the Excess Profits Tax. This was levied at 100% for profits above an aggregate of pre-war profit levels, or above a specified return on capital. Distilleries and merchants could only respond by hunkering down. Most continued to sell to established customers at non exploitative prices, even if they were sitting on stocks whose value was increasing hugely. It was wartime and there was strong social disapproval of using the hardships to make excessive profit. So during the war the industry was subdued. For some outsiders, some market traders,  this restraint was an opportunity. In their eyes the whisky companies were sleeping on assets that could be monetised. It was a definite opportunity.

If only there wasn’t a pesky Excess Profits Tax!

We will never know who first came up with the idea that the tax could be got round by a group of people selling to each other multiple times to ramp up the price and so limit any one persons liability for Excess Profits Tax. It is not known how Jay Pomeroy became one of their number or whether he was the instigator. All we know is that this was the way he made his money and bounced back from bankruptcy.  But many more people were involved and the tax cases were not solely about him. He was not even involved in some of the trades, most notably the deal for Bladnock². The scheme was a group effort but there was more than enough money to share around. In total the Inland Revenue made claims for £3,000,000 and the firms that had been bought and then had their stocks sold at the then current market rate were:

William Longmore (Strathisla),

Bladnock – distillers

Glasgow Bonding Co ltd,

Alexander McGavin & Co (Glasgow) Ltd,

Peter Douglas & Co Ltd,

J.S. & J. Brown Ltd,

Henry Simpson & Co Ltd,

James McVey Ltd,

Thomas Barr Ltd,

William Holt & Sons Ltd – brokers

This is a big story and one of the most exciting thing to happen to whisky in the war, apart from the grounding SS Politician and the salvage of its cargo by the folk of the Western Isles.

Bladnock shows how the scheme worked: November 25 1941 William Hogg  purchased the whole of the issue capital of £7500 £1 shares for £210,000; these shares were then sold to Sit Hector McNeal for £222,100, who then sold to James Donald Stewart for £270,000, he separately bought the whisky stock for £21,940 which was then sold by the company, acting on behalf of Mr Stewart, to the Highland Bonding Company and Donald Macleod & Co Ltd for £527,000. Mr Stewart either did not exist or could not be traced. The key thing was the separation of the stock from the company and the increase in its value. In the Autumn of 1941 the book value of the stock was 3s to 4s a gallon but by the end of the year prices had risen hugely and those in the brokers market were able to get £3-£4 per gallon. Later the value went up to £10 per gallon. Previously the Bladnoch distillery never thought of charging that much, as they sold at 34s.

Jay Pomeroy’s first two deals were in 1941 and involved the whisky brokers:  J.S. & J Brown and Henry Simpson & Co. Interestingly when he finally sold the stock at market price, it was, in both cases, to James Barclay at the Highland Bonding Company, who was also involved in the Bladnock case. Apparently when he made the purchase of J.S. & J Brown, Pomeroy had to ask around for someone who knew something about whisky and could dispose of the stock. James Barclay was suggested, perhaps because he had previously gained a reputation from supplying whisky to America during prohibition and was perhaps flexible in his approach to profit opportunities.

At first I could not work out how Jay Pomeroy managed to make these deals when he was bankrupt, and presumably without access to funds,  but he was personally bankrupt, his old companies (Surplus Sales Ltd and Pomis Ltd) still survived. They were nominally owned by Mrs Margaret Honey and  Mrs Florence Mackenzie, who had always worked for him, so he still controlled the companies, albeit unofficially. Additionally he needed very little money up front.  He pre-sold the stock used and used money from this sale to pay for the purchase of the company. All he had to find was the deposit. In many ways it is like the leveraged buyouts of the 1980s and 90s where solid, established, companies were bought out by smaller companies who financed the deal with junk bonds and then loaded the debt onto the company they just bought.  In both cases it was money created out of nothing. The difference is that in recent years governments have been reluctant to tackle exploitative financial engineering, whereas in wartime the social atmosphere was fully behind the fight against profit taking.

Before the government could take any action, Jay Pomeroy had suddenly become a wealthy man. As he saw very little difference between the assets of his companies and his own wealth, his companies paid off his bankruptcy, funded his opera venture and allowed him to began the life described in the previous post. In it I mentioned that he had a heart attack in 1942 which caused a cash flow problem for his ballet company. Nevertheless, whilst he was recuperating he managed to complete the deal for Strathisla but his wife had to act for him.

In May 1942 98% of the shares of Longmore were acquired on behalf of J.D Stewart (the same straw man involved in Bladnock). At the time Longmore held 177,896 gallons of whisky which was sold to Stewart for £33,178  but he returned 29,000 gallons so the distillery could carry on its normal trade. In June Stewart sold his Longmore shares to D.K. Garfield for £17,500 and these shares were sold to Mrs Ada Kritz in November for £118,000 (with 32,476 gallons of whisky) and then to Mrs Sonia Pomeroy. In December the whisky stock was sold to JS & J Brown (owned by Pomeroy) for £14, 676. This whisky was finally disposed of for £162,270³

Under the legislation in place at the time the government could not recover the Excess Profits Tax (especially as doubted that J.D. Stewart existed) but they could see this was not straight dealing. They therefore took the rare step of introducing retrospective legislation. Retrospective legislation is rightly abhorred because if is contrary to the principles of the rule of law but in this case it was introduced to plug an acknowledged loophole. Section 25 of the 1943 Finance Act allowed E.P.T. to be levied all of the parties who might have benefited excessively from a series of trades. However the clause was drawn broadly and the original shareholders who had sold their stake in the various companies were also deemed to have profited from the scheme. A little unfair you might think as although they got a better price than they would have expected, they would not have known about the shenanigans.

Once the Revenue senses blood it can be merciless.

Big bills, from the Commissioners of the Inland Revenue, landed on a number of mats. The wanted £507,493, divided into two portions, the first which, of £158,690, was for 121 original shareholders. The claims were, of course, contested and he case was heard at the Court of Session in Edinburgh and judgements were given at the end of 1945 and beginning of 1946.

Some individuals were excused liability: the original shareholders, those who were just ciphers, those who were given finding fees, and (interestingly) James Barclay’s Highland Bonding Company, who had been the final sellers and actually made a decent profit. However all the main promoters of the scheme were found liable and the conclusion was clear in the summary:

“The promoters are left subject to joint and several liability. They are found liable under retrospective legislation. But their liability is clear beyond doubt and a distaste for retrospective legislation cannot either influence our construction of the section or disguise the fact that their schemes were, to use a word that is overworked and sometimes abused, anti-social in the high degree.

The scheme used the stocks of the distillery companies for their enrichment without any concern for the interest of others”

But that was not the end of it. There was an appeal to the House of Lords. The Inland Revenue contested some of those who had been let off (I told you they were relentless) and, of course, the promoters contested their liability. This was heard in 1948 and the judgements were upheld except that the original shareholders were once more made liable even though the initial Inland Revenue apportionment was not correct. The case was then finally settled in July 1949 at the Court of Session, who made the final apportionments.

All of Jay Pomeroy’s companies were put into liquidation and he was, once again, made personally bankrupt. But this time there was no way back – the sums were to vast.

In April 1950 the Strathisla distillery was sold at auction for £71,000 to Mr James Barclay who bought it on behalf of Seagrams (yes the Jimmy Barclay who had been involved in the schemes by being the final purchaser. He was obviously adept at playing both ends against the middle).

Strathisla became a much better distillery under the care of Sam Bronfman of Seagrams. Bladnock carried on in its own chequered way and the industry carried on without too much damage from the invaders from London. Status quo was reasserted. It was nevertheless an interesting interlude and it is quite uncertain as to what would have been the result if the retrospective legislation had not been introduced.

P.S. Name changes are a pain. At the time of these transactions the distillery was known as Milton and was renamed Strathisla by Seagrams in 1951. I have inaccurately used Strathisla throughout because that is how we all now know the distillery.

¹ All I have read says whisky production in 1943 was zero but there is a mystery. The Whisky Exchange has two bottles of Glenlivet dating from 1943, which suggests things were not quite so simple. It could be, for example, that they were allowed to use up their malt stocks. I don’t know so I will have to put in the normal caveats and say production was very, very low.

² Poor old Bladnock (and I don’t know why but I always think of it as ‘poor old Bladnock’), so often ignored, has a blank in its history for the 1940s. The Whisky Tax Case fills in some of that gap.

³ The details come from the judgements of the Court of Session held in the National Records of Scotland

The Pomeroy Posts:

1. An Introduction
2. The Two Jays – how a novel can be used as a lens to compare characters.
3. The Years of Obscurity – the first ¾ of his life.
4. The Glory Years – His  years as an impresario.
5. The Whisky Tax Case – the revenge of the Revenue
6. Sam and Jay – There were some similarities between Sam Bronfman and Jay
7. Chinese Whispers – how the whisky literature has misrepresented Jay Pomeroy
8. McBain and Maclean -A source of some misunderstandings
9. And Finally – at last
10. Kritz not Pomeroy – Mistaken identity?