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HMRC internal manual

Business Income Manual

Wholly and exclusively: case law: incidental benefit

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

No bar to allowance if the purpose is wholly and exclusively for the trade, profession or vocation

An expense may of necessity provide a benefit to a third party. For example, the supplier of goods to the trader is likely to profit from the transaction.

Equally the trader in his or her own personal capacity may benefit from the expenditure. For example, the trader in the course of his or her business may meet interesting people or travel to desirable destinations.

But an expense is not disallowed by S34(1)(a) ITTOIA 2005 (for unincorporated businesses) and S54(1)(a) CTA 2009 (for companies) because the trader (or third party) obtains an incidental or personal benefit provided that it was not part of the purpose in incurring the expense to secure such benefit. The problem you will face is how to distinguish between:

  • an incidental or unsought benefit, and
  • the furtherance of some non-trade objective

The possibility that an ‘incidental benefit’ may accrue means you cannot decide ‘wholly and exclusively’ issues by reference only to the effect(s) that follow from the payment. You must establish all of the facts from which you may infer the trader’s purpose (or purposes).

The issue is described in the case of Bentleys, Stokes & Lowless v Beeson [1952] 33 TC 491. The case concerned the cost of lunches incurred by partners in a firm of solicitors in entertaining existing clients and where business matters were discussed. The case concerned the law as it applied prior to the statutory disallowance for expenditure on entertaining, in what is now S45 ITTOIA 2005 and S1298 CTA 2009. The lunch appointments were so arranged as to allow the discussion of any business in hand and the giving of any legal advice required. Only the partner concerned and the client (or their representative) was present on each occasion and the legal advice was charged in the normal way.

The Commissioners found that the entertainment involved an element of hospitality and concluded that the expenditure was not allowable. The courts decided that the finding that the lunches involved the provision of hospitality did not conclude the matter. There was no evidence in the stated case to suggest that this was private or social hospitality and not business hospitality. The question was therefore - is the cost of the lunches money expended wholly and exclusively for the purposes of the trade?

In the Court of Appeal, Romer LJ explained why the expenditure was allowable. Romer LJ said that, in the phrase ‘wholly and exclusively’, the word ‘wholly’ referred to the quantum of money and the word ‘exclusively’ referred to the purpose - the purpose must be the sole purpose. There was no dispute as to the amount of money involved. The issue was whether the taxpayer’s exclusive purpose was for their profession. Romer LJ observed that entertaining inevitably involves an element of hospitality but that does not mean that it is automatically disallowable (remember the case preceded what is now S45 ITTOIA 2005 and S1298 CTA 2009).

Various other matters that have come before the courts also involved a degree of benefaction and have resulted in an allowance on their own particular facts, for example:

  • subscribing to a staff pension fund (see British Insulated and Helsby Cables, Ltd v Atherton [1925] 10 TC 155, BIM35010), and
  • giving to charity (see BIM45072), and
  • supporting an exhibition (see Morley v Lawford [1928] 14 TC 229 BIM37780).

As mentioned above, Bentleys, Stokes & Lowless v Beeson [1952] 33 TC 491 was heard before what is now S45 ITTOIA 2005 and S1298 CTA 2009 was enacted to disallow the costs of entertaining (see BIM45000 onwards). The case is nevertheless important because Romer J’s explanation applies to expenditure other than that specifically incurred on entertaining. The question to address is not whether the expenditure results in a personal benefit accruing to the trader but whether it is incurred solely for the purposes of the trade. This is a question of fact. The part of Romer J’s judgment on which the above guidance is based is set out below (33TC at the foot of page 503 and the head of page 504):

‘It is conceded that the first adverb - “wholly” - is in reference to the quantum of the money expended and has no relevance to the present case. The sole question is whether the expenditure in question was “exclusively” laid out for business purposes, that is: What was the motive or object in the mind of the two individuals responsible for the activities in question? It is well established that the question is one of fact: and again, therefore, the problem seems simple enough. The difficulty however arises, as we think, from the nature of the activity in question. Entertaining involves inevitably the characteristic of hospitality. Giving to charity or subscribing to a staff pension fund involves inevitably the object of benefaction. An undertaking to guarantee to a limited amount a national exhibition involves inevitably supporting that exhibition and the purposes for which it has been organised. But the question in all such cases is: was the entertaining, the charitable subscription, the guarantee, undertaken solely for the purposes of business, that is, solely with the object of promoting the business or its profit earning capacity?

It is, as we have said, a question of fact. And it is quite clear that the purpose must be the sole purpose. The paragraph says so in clear terms. If the activity be undertaken with the object both of promoting business and also with some other purpose, for example, with the object of indulging an independent wish of entertaining a friend or stranger or of supporting a charitable or benevolent object, then the paragraph is not satisfied though in the mind of the actor the business motive may predominate. For the statute so prescribes. Per contra, if in truth the sole object is business promotion, the expenditure is not disqualified because the nature of the activity necessarily involves some other result, or the attainment or furtherance of some other objective, since the latter result or objective is necessarily inherent in the act.’