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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Wholly and exclusively: how to establish purpose: a question of fact to be decided by examining the evidence

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

You need to obtain and review all available evidence

You need to obtain and consider all of the evidence (which should include contemporaneous documents, agreements, notes of meetings and any other records or documentation) to determine whether an expense was laid out wholly and exclusively for the purposes of the trade.

The motive of the trader in incurring the expense is an important part of the evidence. In a contentious hearing on a wholly and exclusively point you should interview potential witnesses and assess their accounts as evidence. You also need to obtain any available independent documentary evidence.

To decide the issue you must establish the specific facts in each case. If you are going to argue that there is a non-trade purpose you must (other than in the narrow class of cases where there is an inevitable non-trade purpose - see BIM37900) establish evidence to support your view. In many cases, a face to face meeting with the parties directly involved may be the speediest way to establish the purpose(s) of the disputed expenditure.

While the taxpayer’s evidence as to purpose is important, it is by no means conclusive. If the only evidence as to purpose is what the trader (or the directors of a company) says then the tribunal may well find that they have to make a finding of fact in accordance with that evidence. In reaching their decision the tribunal may, in addition to the evidence adduced by the taxpayer as to their conscious motive, also take into account all the surrounding circumstances. In Morgan v Tate & Lyle Ltd [1954] 35 TC 366 (see BIM35570), where the costs of an anti-nationalisation campaign were allowed, Lord Reid explained, on page 415:

`In the Case Stated the Commissioners set out fully the evidence which was before them and which they accepted, and then they state that they

“found that the sum in question was money wholly and exclusively laid out for the purposes of the Company's trade”,

but they do not state specifically what the purposes were. The purpose of a person or of a board of directors in spending money is a pure matter of fact. It may be that it can only be ascertained by drawing an inference from other facts, but the Commissioners are entitled to draw inferences.’

In the case of Robinson v Scott Bader Co. Ltd [1981] 54 TC 757 (see BIM38250) in the Court of Appeal Waller LJ discussed whether the test is subjective or objective and concluded that it depends on the circumstances, saying at pages 771H to 772B:

`…I will consider first the argument that the test is objective and not, as the Judge found, subjective. The phrase with which the Case is concerned is “for the purposes of”. In my judgment “purpose” contains an ingredient of ‘intention’. It is very difficult, but perhaps not impossible, to determine this without some element of subjectivity. Indeed, in many cases the test will be wholly subjective. When deciding whether or not a solicitor is entertaining a client to lunch, the test must be wholly subjective. The solicitor is entertaining; it may be because it is an old client; it may be because it is the only opportunity to discuss the business. The court has to decide the real purpose, if it is for the trade, vocation or profession, and whether it is independent, i.e. independent of the business purposes to be served. [SeeBentleys, Stokes & Lowless v Beeson[1952] 33 TC 491 at pages 504 - 505- see BIM37400.] It would be impossible in such a case to do other than make the decision subjectively. In considering the purposes of a company there may be room for some objectivity, but it will normally be to assist in making the subjective decision. There may be a case where the evidence shows that something was done in a different capacity altogether, e.g. Smiths Potato Crisps (1929) Ltd v Commissioners of Inland Revenue 30 TC 267 [seeBIM37850], where it was held that something done as a taxpayer could not be for the purposes of the trade, profession or vocation. In my opinion, in spite of Mr. Potter’s [counsel for the Crown] submission to the contrary, that does not arise in this case.’

Following Robinson v Scott Bader Co. Ltd it is at times argued that where a trader or director of a trading company gives evidence as to purpose and that evidence cannot be impugned then the argument is thereby concluded in the taxpayer’s favour. This is not so as demonstrated by the judgments in the two cases described below.

In the case of Joseph Thompson & Sons Ltd v Chamberlain [1962] 40 TC 657, the company claimed to deduct the amount that it subscribed to a trade association, the Economic League, which distributed anti-socialist literature. Ungoed-Thomas J said that, in the case before him, there was not the same direct evidence as to purpose as there had been in Morgan v Tate & Lyle Ltd [1954] 35 TC 366. He went on to say, at page 669:

`…even if there were such direct evidence, the ipse dixit of the Company would not necessarily establish the purpose. All the facts would have to be considered in reaching the conclusion whether, in reality, the payments were made exclusively for the purposes of the Company’s trade.’

Ungoed-Thomas says that when considering ex-gratia payments to third parties, not exclusively for services, it may be ‘most material’ to consider the objects of the body to which the payment is made. This is a useful point to remember when dealing with ex-gratia subscriptions and contributions.

In Garforth v Tankard Carpets [1980] 53 TC 342 (see BIM38210), the company had given security by way of a guarantee in favour of an associate company. The guarantee was called in and the company claimed as a trading loss the expenditure it had to meet under the guarantee. Walton J indicated that in such circumstances it would be extremely difficult for the company to establish that the guarantee that it gave was wholly for the purposes of its own trade and not at all for the purposes of the company benefiting from the guarantee. Walton J suggests that where the directors were common to both companies it would take a superhuman effort of mind to distinguish the purposes of one company from those of the other; that Commissioners should be slow to accept that such an act was done solely for the benefit of one company’s trade. They should do so only where there are wholly separate findings of primary fact not depending on the say-so of the directors concerned. So when weighing the evidence of directors as to purpose you should bear in mind Walton J’s remarks starting on page 349:

`…it must in the nature of things be extremely difficult for any directors of two associated companies in the position of Carpets and JLT to be certain in whose best interests - or, rather, in whose exclusive interests - any step which they take is being taken. Obviously, there is nobody but themselves to say what was in their own minds; and obviously, again, it must require a superhuman effort of mind (of which extremely few persons, if any, are capable) to rule out entirely from consideration the possibility of benefit to one’s other company when concentrating on the exclusive requirements of just one of them. In my judgment, Commissioners should be extremely slow in coming to any conclusion that the act was done solely for the benefit of the trade of one of the companies concerned and should in general do so only where there are wholly separate finding of primary fact not depending on the say-so of the directors concerned. I cannot resist the impression that in 99 cases out of 100 the correct primary fact to find will be that which was in fact found in this case; namely, that in such a situation as the present the interests of all the companies were considered together. This is in accord with all the probabilities in the present and, indeed, most foreseeable cases.’

The payment under the guarantee was therefore disallowed.