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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Wholly and exclusively: how to establish purpose: whose purpose?

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

Does a body corporate have a mind of its own?

S34 Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses and S54 Corporation Tax Act 2009 for companies refer to ‘the purposes of the trade’. But what does this mean? Can an inanimate entity such as a trade have a purpose? Millet LJ in Vodafone Cellular & Others v Shaw [1997] 69 TC 376 gives an excellent up to date summation of what is required to pass the wholly and exclusively test (see BIM38220).

Lord Shaw of Dunfermline in the case of Smith v Lion Brewery Co Ltd [1910] 5 TC 568, (which concerned the deduction of compensation fund levies) said on page 600:

`…the words ‘purposes of such trade’ do not mean the motives animating the minds of the traders, but do mean the purposes to and for which the money is applied and expended.’

So this early case drew a distinction between ‘motive’ and ‘purpose’. This distinction has not always been followed in later cases.

The later cases show that when considering the words ‘for the purposes of the trade’ you are really talking about the aims or objectives that underlie the expenditure. You need to establish what was in the mind of the trader.

Where the trader is an individual or a partnership of individuals this does not pose any particular problem. But what about the situation where the trader is a legal person, such as a body corporate? Does a body corporate have a mind of its own?

Lord Morton in the case of Morgan v Tate and Lyle Ltd [1954] 35 TC 366 (see BIM35570) said (at page 408) that the purpose for which a company spends money can only be the purpose of the directors or of the shareholders (in the latter instance, if such purpose is expressed at a general meeting):

`My Lords, the purpose for which a company expends money can only be either the purpose of the directors, if they expend it under the powers conferred upon them by the memorandum and articles without the express sanction of a general meeting, or the purposes of the shareholders if these purposes are expressed at a general meeting.’

Lord Reid gave a similar view in the same case, at page 415:

`…in order to determine for what purposes money was spent, it is necessary to ascertain what was in fact the purpose of the trader in spending the money. In this case the trader was a limited company, which in the eye of the law is a person distinct and different from the shareholders or any of them, and such an artificial person cannot in any real sense have a purpose. But the purpose of the body which was entitled to act and did act for the Company must be held to be the Company’s purpose.’

The same view is expressed by Diplock LJ in Harrods (Buenos Aires) Ltd v Taylor Gooby [1964] 41 TC 450 (see BIM37300) where he tells us at page 469:

`The statutory expression ‘the purposes of the trade’ is not a metaphor which personifies the trade, to which it ascribes human aims and objects. It is concerned with the actual purposes for which the actual person who carries on a trade expends money, and ‘of the trade’ is an adjectival phrase limiting ‘the purposes’ for which the expenditure of money is a permissible deduction in computing the profits of his trade for Income Tax purposes.’

Lord Brightman in the Mallalieu v Drummond [1983] 57 TC 330 (see BIM37910) stated that, in his opinion, the words ‘the purposes of the trade’ meant:

`…expended to serve the purposes of the trade.’

Brightman thought this to be similar to the interpretation used by Lord Davey in Strong and Co of Romsey Ltd v Woodifield [1906] 5 TC 215 (see BIM38510) when Lord Davey talked about the purpose of enabling a person to carry on and earn profits in the trade.