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HMRC internal manual

Business Income Manual

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Wholly and exclusively: statutory background: what the guidance covers: the statutory prohibition

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

Expenditure must be incurred wholly and exclusively for purposes of the trade

The statute has, from the earliest days, included a rule restricting deductions to those incurred wholly and exclusively for the purposes of the trade. The words used have been subject to very little alteration over the years.

The current form of words is in S34(1)(a) ITTOIA 2005 for unincorporated businesses and S54(1)(a) CTA 2009 for companies, which provide:

`In calculating the profits of a trade, no deduction is allowed for -

    1. expenses not incurred wholly and exclusively for the purposes of the trade…’

Not all payments are capable of satisfying this statutory test. A two-stage approach is required:

  1. first, you need to establish if the expense is capable of satisfying the statutory rule. This is a question of law
  2. second, having established that the expense is capable of satisfying the statutory rule, you must establish if it was incurred wholly and exclusively for the purposes of the trade. This is a question of fact

It is therefore essential that you fully establish the facts before entering into discussion as to whether the particular deduction being claimed satisfies the statutory test in S34 ITTOIA 2005 and S54 CTA 2009 (see BIM37065).

Lord Reid explained the approach in CIR v Dowdall O’Mahoney & Co Ltd [1952] 33 TC 259. A UK company claimed to deduct Irish Tax in computing its liability to Excess Profits Tax. The company was successful before the Commissioners. Through the courts the company argued that it was a question of fact whether expenditure was incurred wholly and exclusively for the purposes of the trade; concerning which the Commissioners’ decision was final and so concluded the matter. Lord Reid would have none of this argument. In considering the application of what is now S54(1)(a) CTA 2009, he said, at pages 276-277:

`In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment, or vocation’. So it is necessary to determine whether any part of the Irish taxes paid by the Respondents can in law be regarded as money wholly and exclusively laid out or expended for the purposes of the Respondents’ trade.

It was argued for the Respondents that this is a question of fact and that therefore the decision of the Commissioners on this matter is final in their favour. I cannot accept this argument. If certain payments made by a taxpayer are of such a kind that they are capable in law of being regarded as coming within the exception in [what is now S54(1)(a) CTA 2009] then no doubt it is for the Commissioners to determine whether the circumstances of the case are such that in fact they do come within that exception. But it is in my judgement a question of law whether particular payments are of a nature capable of coming within the exception, and that is the issue here.’

Lord Reid took the view that the Irish tax was a tax on profits. That the tax arose after profits had been earned and was not an expense incurred in earning the profits. Therefore the tax could not by its nature be an expense deductible in arriving at the profits for UK tax.

The same question arose in Boarland v Kramat Pulai Ltd [1953] 35 TC 1. The case concerned a claim to deduct the costs incurred by a company in publishing and circulating a political pamphlet entitled ‘Chairman’s supplementary remarks at annual general meeting’. The pamphlet carried criticism of the policies of the government of the day. The Commissioners decided in the company’s favour but in the High Court Dankwerts J reversed their decision, saying at page 14:

`It seems to me that it is a question of law on the authorities whether a pamphlet in this particular form is capable of being wholly and exclusively for the purposes of advancing the trade of the company…’

Dankwerts J went on to say that one only had to peruse the pamphlet to see that if it had a trade purpose, as contended by the company, such was not the only purpose. Dankwerts J said that he was entitled to hold as a matter of law that the expenditure was incapable of satisfying the statutory test.

The long duration of the legislation in essentially unchanged form has produced a great deal of case law, which is still applicable today. You will discover from the cases the importance of establishing evidence as to purpose. Where an expenditure, as a question of law, is capable of satisfying the statutory requirement then to deny a deduction you will need to establish to the Tribunal’s satisfaction that there was a non-trade purpose (or that the expenditure was of a class where an intrinsic non-trade purpose can be assumed, see BIM37900).

It is a general principle that the construction of words in a statute is, in the first instance, a question of law. But where the words of the statute are words in common usage, it becomes largely a question of fact whether those words apply to a particular situation. It is therefore essential in wholly and exclusively cases that you fully establish and consider all of the relevant facts.