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HMRC internal manual

Business Income Manual

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Wholly and exclusively: how to establish purpose: distinction between ‘purpose’ and ‘motive’

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

Look at the direct and immediate purpose

In criminal law there is a clear distinction between motive and purpose. The criminal law is primarily concerned with the action taken and less with the motive that inspired it. In wholly and exclusively cases what matters is the purpose of the expenditure and not the payer’s motive. Judges have from time to time commented on the distinction between purpose and motive. But the distinction between motive and purpose in wholly and exclusively cases can be less clear cut and philosophical debate on the point is of doubtful utility.

S34(1)(a) Income Tax (Trading and Other Income) Act 2005 for unincorporated businesses and S54(1)(a) Corporation Tax Act 2009 for companies deny a deduction for expenditure that is not incurred wholly and exclusively for the purposes of the trade, profession or vocation. It is the payer’s immediate purpose and not some remoter or supposedly underlying purposes that is important. It is not sufficient that the expenditure results in an advantage for the trade, the direct and immediate purpose of the expenditure is what matters.

When considering the purpose of expenditure the courts have interpreted this to mean the object sought to be achieved. But Judges have not always been clear in the differences of meaning between the words that they use. For example Romer LJ in Bentleys Stokes & Lowless v Beeson [1952] 33 TC 491 (see BIM37400) uses the words ‘object’, ‘motive’ and ‘purpose’ quite indiscriminately.

In Union Cold Storage v Jones [1924] 8 TC 725 (see BIM37200), the Master of the Rolls, Pollack, explained, at page 741, that:

`…you must look at what is the direct concern and direct purpose for which money is laid out, and I do not think that you can go to the remoter or indirect results for which it may be possibly useful to lay out money.’

In Smith’s Potato Estates Ltd v Bolland [1948] 30 TC 267 (see BIM37850), Lord Simmonds emphasised that it is purpose and not motive that counts, at page 294:

`If the expense of contesting a tax claim is not per se a deductible expense, I cannot accept the proposition that some special ulterior motive makes it deductible. I see that money has been laid out for the purpose of contesting a tax claim. I know, for I assume that to have now been decided, that money so laid out is not laid out wholly and exclusively for the purposes of trade. I do not understand by what process of reasoning the contrary result is reached and it is found to be wholly and exclusively laid out for the purposes of trade because there was an ulterior motive. This is to confuse motive with purpose.’

In the Marshall Richards Machine Tool [1956] 36TC511 case (see BIM37790) Upjohn J at page 526, when discussing the payment made by a UK company to help its American subsidiary meet its obligations, said:

‘That is exactly what the payment was for, and it was not laid out in any sense at all to advance the trade of the parent company. Of course, that was the motive, but it was not the purpose of the payment.’

In Lawson v Johnson Matthey plc [1992] 65TC39 (see BIM37795 for the wholly and exclusively aspects and BIM35000 onwards for the capital/revenue aspects of this case) the House of Lords found that the company’s immediate purpose in paying the £50m to the Bank of England was wholly and exclusively for the purposes of its trade.