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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Wholly and exclusively: statutory background: what the guidance covers: expenses rule for employees

S336 Income Tax (Earnings and Pensions) Act 2003, S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

Other legislation using the term ‘wholly and exclusively’

The words ‘wholly and exclusively’ also appear as part of the general expenses rule for employees in S336 Income Tax (Earnings and Pensions) Act 2003. For employees, one leg of the test for a deduction to be allowed for an expense amount is that it must be incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

There have been a number of occasions when judges considering the trading profits ‘wholly and exclusively’ test have referred to judgments relating to the employee expenses rule.

For example, in the judgment in Mallalieu v Drummond [1983] 57 TC 330 Lord Brightman (at page 370) specifically refers to the decision in Hillyer v Leeke [1976] 51 TC 90, a case about an employee’s clothes. That earlier case was decided on the basis that the cost of buying clothes is not wholly or exclusively incurred in the performance of the duties of the employment. An individual has to wear clothes for his own purposes of cover and comfort at the same time as wearing them in order to have the appearance that the job requires. See BIM37910 for more details.

To the extent that the judgments did not turn on the additional requirement that the expenditure be ‘necessarily incurred in the performance of the duties’ then employment cases can give a useful insight on the meaning of ‘wholly and exclusively’.

You should note that S34 Income Tax (Trading and Other Income) Act 2005 (for unincorporated businesses) and S54 Corporation Tax Act 2009 (for companies) do not include the requirement that the trading expenses also be ‘necessary’ in order to be deductible. Whilst it is reasonable to scrutinise the claimed purpose of an expense you should not attempt to substitute your own judgement for that of the taxpayer. If the taxpayer can show that their only purpose for incurring a particular expense was for their trade, profession or vocation then it does not matter that the same result could have been achieved by different means or that the expenditure in the event fails to achieve the established purpose. See BIM37050. Expenditure that is manifestly uneconomic may be an indication that there was another (non-business) reason for it being incurred, in which event you should disallow it.