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HMRC internal manual

Business Income Manual

Deductions - scope of: how to establish purpose

All the evidence (which may include documents, agreements, notes of meetings and any other records) should be considered in determining whether an expense was laid out wholly and exclusively for trade purposes. The motive of the trader in incurring the expense is an important part of the evidence; but his or her own say-so is not necessarily decisive.

If the only direct evidence as to purpose is the say-so of the trader (or directors of a company), the Tribunal may well find that it has to make a finding of fact in accordance with that evidence - see Robinson v Scott Bader & Co Ltd [1981] 54TC757 (see BIM38250) and O’Keefe v Southport Printers Ltd [1984] 58TC88 (see BIM38320). But the Tribunal is entitled to take into account all the surrounding circumstances, as well as evidence adduced by the taxpayer as to his or her own conscious purpose (see the judgment of Lord Reid in Morgan v Tate & Lyle Ltd [1954] 35TC367 (see BIM35570) on pages 415/6 and Ungoed Thomas J in Joseph Thompson & Sons Ltd v Chamberlain [1962] 40TC657 on page 669 (see BIM37065)).

In Mallalieu v Drummond [1983] 57TC330 (see BIM37910) the purpose of the expenditure was not found to be restricted to the conscious motive of the taxpayer. The decision of the Commissioners that, on consideration of all the facts, there was dual (private/business) purpose in incurring the expenditure on clothing that was essential for the barrister’s practice was endorsed in the courts. But it does not follow from the decision in Mallalieu v Drummond that it is possible simply to infer the purpose of expenditure from its effect.

It is important in preparing for a contentious hearing on a wholly and exclusively point to interview any potential witnesses to assess their account as evidence, and to obtain whatever independent documentary evidence is available.

Further guidance on how to establish the purpose of expenditure is at BIM37050 onwards.