Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Income Manual

Wholly and exclusively: topics covered

S34 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S54 Corporation Tax Act 2009 (CTA 2009)

Introduction and layout of guidance

For unincorporated businesses, the profits of a trade, profession or vocation (see BIM14010) are taxed as trade profits under S5 ITTOIA 2005. The trading profits of companies are taxed under S35 CTA 2009. To calculate those profits you need to determine:

  • whether sums arising are taxable income of the trade, profession or vocation - see BIM15035
  • the time at which receipts or expenses should be recognised - see BIM31090 onwards, and
  • what deductions are allowable in computing the profits - see BIM42050 onwards

By no means all of the expenditure incurred by a trader is allowable as a deduction in computing the profits of a trade. There is no comprehensive list of allowable and disallowable expenditure. In general, revenue expenditure is allowable unless there is a specific statutory prohibition. There are several pieces of legislation that either allow or disallow specific expenses. For example:

  • S45 ITTOIA 2005 and S1298 CTA 2009 disallow the cost of entertainment - see BIM45000 onwards.
  • S58 ITTOIA 2005 permits the deduction of certain costs of raising loan finance for unincorporated businesses - see BIM45800 onwards. For companies, such expenditure is dealt with under the loan relationship rules - see CFM32010.

There is also legislation that disallows classes of expenditure, for example S34 ITTOIA 2005 and S54 CTA 2009 deny a deduction for expenses not incurred wholly and exclusively for the purposes of the trade.

Expenditure may be segregated into two broad categories.

Revenue expenditure

The day to day running costs of a business (eg staff wages, purchase of trading stock, rent of business premises, and so on) are referred to as revenue expenditure. Revenue expenditure is sometimes described as circulating capital. This description reflects the fact that the capital in question leaves the owner’s possession (changes masters) to produce profit or loss. The capital may be considered as being ‘turned over’. In the process of turning over, profit or loss ensues.

Unless there is a specific statutory prohibition (of which S34 ITTOIA 2005 and S54 CTA 2009 are the most commonly encountered), revenue expenditure is allowable.

Capital expenditure

Capital expenditure (eg the purchase of business premises, plant and machinery used in the business process and so on) in practice is the opposite of revenue expenditure.

Unless specifically allowed by statute (eg the incidental loan finance for unincorporated businesses mentioned above), capital expenditure is not allowable.

There is detailed guidance on the capital/revenue divide at BIM35000 onwards.

The wholly and exclusively chapter covers the subjects listed below.

BIM37007 Overview
BIM37010 Statutory background
BIM37050 How to establish purpose
BIM37100 Case law
BIM37200 Remoteness
BIM37300 Capacity test
BIM37400 Incidental benefit
BIM37500 Subscriptions and donations
BIM37600 Duality of, or non-trade purpose - travel costs
BIM37650 Duality of, or non-trade purpose - non travel topics
BIM37700 Duality of, or non-trade purpose: remuneration etc
BIM37750 Duality of, or non-trade purpose: loans/advances to others
BIM37800 Expense of earning or application of profits?
BIM37900 Expenditure having an intrinsic duality of purpose
BIM38100 Partnerships
BIM38200 Companies
BIM38300 Commencement, cessation or sale of business
BIM38400 Artificial prices
BIM38500 Fines, penalties and damages
BIM38600 Tax cases referred to in the guidance