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HMRC internal manual

Business Income Manual

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Wholly and exclusively: overview

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

Three important issues

Not everything charged in the profit and loss account of a trade, profession or vocation is an allowable deduction for tax purposes. For example, you add back depreciation when you compute the taxable profits.

S34 Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses and S54 Corporation Tax Act 2009 for companies prevent a taxpayer deducting expenditure in computing their trading profits unless it is incurred wholly and exclusively for the purposes of the trade, profession or vocation.

The following guidance describes how the statutory restriction works. You should note the following points.

Sole purpose

The legislation disallows any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation. This means that the rule is only satisfied if the taxpayer’s sole purpose for incurring the expense is for the purposes of their trade, profession or vocation. If you identify a non-trade purpose then the expenditure is not allowable.

This remains the case even if there is also one or more business reasons for making the expenditure. Dual-purpose expenditure is expenditure that is incurred for more than one reason. If one of the reasons is not for business purposes, the expenditure fails the statutory test and there is no provision that allows a ‘business’ proportion. But see the comments below concerning expenditure where an identifiable part or proportion is wholly and exclusively for the purposes of the trade, profession or vocation.

For further discussion of duality of purpose see BIM37600 onwards.

Incidental benefit

You need to exercise care when applying the ‘wholly and exclusively’ test. Where a taxpayer incurs an expense wholly and exclusively for the purposes of their trade, profession or vocation an incidental benefit may arise. Such an incidental benefit does not, of itself, mean that the expenditure is disallowed.

For example a self-employed consulting engineer may travel to exotic locations to advise on projects. The travel and the exotic locations may be benefits but where there was no private purpose they are incidental to the carrying on of the profession and the cost is allowable.

For further guidance see BIM37400.

Apportionment and duality

When you consider the application of the ‘wholly and exclusively’ test, it is important that you distinguish between cases where:

  1. a definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation. That part or proportion should not be disallowed on the ground that the entire expense is not laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation
  2. an expense has been incurred for a dual purpose. Such expenditure should be disallowed

For expenditure satisfying (a) above, there are classes (eg motor expenses, use of home as office) where the pattern of usage lends itself to a statistical approach. A detailed review for a representative period can be used to establish the amount of the total expenditure that is deductible. This allows you to determine the proportion of the expenditure in the representative period that is deductible. It is sensible to continue to use this proportion until the underlying circumstances change.

For further guidance see BIM37600.