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Business Income Manual

HM Revenue & Customs
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Wholly and exclusively: expenditure having an intrinsic duality of purpose: food and drink consumed at solicitors' annual conference and other matters

S34 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)

Food and drink consumed during partnership meetings is not allowable

Food and drink consumed during partnership meetings is not allowable. But the costs of overnight accommodation incurred to allow discussion of ordinary business matters is allowable notwithstanding that the charge was inclusive (that is to say, included food and drink).

In the case of Watkis v Ashford Sparkes & Harward [1985] 58 TC 468, a firm of solicitors with 19 partners practising from offices in various towns in Devon, claimed a deduction for:

  1. food and drink consumed by the partners in the course of weekly or fortnightly local lunchtime meetings held in the Exeter and Tiverton offices between the hours of 1pm and 2pm. Topics dealt with at these meetings were entirely business matters. The lunch-hour was chosen to avoid interfering with commitments to clients and to maximise the chances of the partners concerned being able to attend.
  2. food and drink consumed at six evening meetings of all the partners. The topics that were considered at these evening meetings were important matters affecting the firm generally. They started at 6pm and continued over the meal, which was taken at about 8pm. Although the second part of these meetings was less formal than the first, the conversation over the meal was all about the affairs of the firm.
  3. provision of accommodation, food and drink for the partners on the occasion of the firm’s annual conference. Annual conferences had been held for some years. There were two formal sessions, one of about two hours on Saturday afternoon and one of about two hours on Sunday morning. However, business discussion was not limited to those formal meetings, the object of the exercise being that the partners should be able to continue the discussion of these particularly important business topics informally for the rest of the weekend. The continuity of these discussions was of considerable importance and value.
The conference was attended not only by all partners and one consultant to the firm, but also by partners’ wives and children. The wives were invited for two reasons: first, to maximise attendance as some of the married partners might have been less likely to attend if they had had to leave their wives behind; and, secondly, because it was thought desirable that at least once a year the wives should have the opportunity to be present with their husbands and the other partners and their wives to discuss problems affecting the running of the firm. Children came too because in many cases the younger wives could not go away for a weekend without taking their children with them.
  1. the firm’s contribution to expenditure incurred by their own and three other firms of solicitors in providing a room and food and drink for partners of all four firms in connection with a meeting called to discuss matters of common professional concern, known as the Kitopenel conference. This meeting was for discussion of topics of mutual professional interest, first at a formal meeting and afterwards at dinner. The conversation over dinner was all about business matters.

The Special Commissioner allowed the expenditure in full.

In the High Court Nourse J disallowed the whole of the expenditure under points (1) and (2), and the food and drink element in point (4). This followed from the finding that the meals were provided at times when the partners would normally have eaten lunch or dinner and followed the decision in Mallalieu v Drummond [1983] 57 TC 330 (see BIM37910).

Nourse J allowed the expenditure under point (3) because applying Edwards v Warmsley Henshall [1967] 44 TC 431 (see BIM37615) he could not distinguish between the cost of accommodation and food and drink; they not having been billed separately.

Nourse J considered the, at the time recent, decision in Mallalieu v Drummond [1983] 57 TC 330 (see BIM37910).

`Mr Bates, for the taxpayers, has pointed out that Miss Mallalieu was seeking to upset the decision of the General Commissioners and that she could only do that if she could bring the case within the principle of Edwards v Bairstow [& Harrison 36 TC 207, see BIM37045]. He says that their Lordship’s only concern was to consider whether the Commissioners were entitled to find that she had a dual purpose. That is strictly speaking correct, although it is certainly significant that Lord Brightman said that he himself would have found it impossible to reach any other conclusion. Furthermore, Mr Bates accepts that the decision is at the least authority for the proposition that the conscious motive of the taxpayer in incurring the expenditure, although of vital significance, is not inevitably the only object which can be found to exist. Mr Carnwath, for the Crown, goes further and submits that the decision [in Mallalieu v Drummond] establishes that in the ordinary case of expenditure which meets the needs of the taxpayer as a human being, such as the cost of the food that you eat and the clothes that you wear, it is not open to the Commissioners to treat the meeting of those needs merely as an incidental effect of a business object or purpose; it must be treated as a separate purpose in itself, albeit that it may be a subsidiary one. Although it is unnecessary for me to decide whether their Lordships intended to establish a general rule to the effect for which Mr Carnwath contends, it seems to me that the practical consequences of so clear and authoritative a decision are almost certain to be the same.’

The decision was authority for the proposition that the conscious motive of the taxpayer in incurring the expenditure, although of vital significance, is not inevitably the only object which can be found to exist.

Nourse J explained that just because the participators enjoyed the events that they attended it does not follow that the costs are to be disallowed. In Nourse J’s view that consideration was largely if not wholly irrelevant. `Many people enjoy their work. Many people do not enjoy social occasions, particularly when they are in some way connected with work. But many occasions which are social in form, whether they are enjoyed or not, are very successful in furthering business interests’.

Nourse J explained why expenditure under points (1), (2) and (4) is not allowable:

The real question was whether the Commissioner was entitled to find that the business purpose in incurring the expenditure was not just the predominant purpose but in truth the exclusive purpose, so that any private benefit to the taxpayers was purely incidental. …The food and drink at the lunch-time and evening meetings and at the Kitopenel conference was provided at times when the partners would normally have eaten lunch or dinner anyway. There was no evidence and no finding that if the meetings had not been held they would not have lunched or dined elsewhere, and I do not think that he could make any inference to that effect. …The lunches and dinners took the place of meals that would have been consumed in any event, and even if that was not so the result would be the same. Just as Miss Mallalieu needed to wear clothes not only when she was in court but also when she was not, so did the taxpayers need food and drink irrespective of whether they were engaged on a business activity or not’.

The requirement to eat arose out of a human need and not for the purposes of the taxpayers’ profession.

Finally, Nourse J explained why the partners’ costs at the annual conference are allowable; not to satisfy a need for accommodation but to allow discussion to continue. The cost of the food, drink and accommodation at the annual conference was different:

`I do not think that the cost of the accommodation can necessarily be said to have been expenditure which met the needs of the taxpayers as human beings. They did not need it for that purpose because they all had their own homes where they could have spent the night. The reason why they needed it was so that they could continue their discussion informally between the formal sessions on the Saturday afternoon and the Sunday morning. …The Commissioner was entitled, on the facts found, to conclude that the business purpose in incurring the cost of the accommodation was the exclusive purpose and that the private benefit to the taxpayers was purely incidental’.

This conclusion was not one with which Nourse J could interfere - Edwards v Bairstow & Harrison [1955] 36 TC 207 (see BIM37045).

Nourse J dismissed the Crown’s alternative arguments under what was S74 (1)(b) Income and Corporation Taxes Act 1988 (which prevented a deduction for expenses for the maintenance of the taxpayer’s family or some other private purpose), that the expenditure was incurred on the maintenance of the parties, on the basis that this was factually incorrect. This provision was repealed by ITTOIA 2005 and not rewritten on the basis that the it was redundant - only S34(1)(a) ITTOIA 2005 is needed to prevent such a deduction. The disputed expenditure was intended to secure continuity of discussion. You can see the importance of establishing the true purpose of disputed expenditure.

You should remember that of the claimed expenditure only that in respect of the annual conference was allowed. All of the expenditure on food and drink for the regular meetings was disallowed as was the food and drink at the meeting with fellow professionals.