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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Deductions - scope of: companies

The company’s purpose is established by reference to the purpose of those who are entitled to act for it. See BIM38210.

Companies under common control

For companies under common control it may be relevant to consider if the purpose of an expense was wholly and exclusively for the trade carried on by the paying company. If two companies which share the same directors benefit from an expense incurred by one of them, facts independent of the say-so of the directors will be needed to establish that the purpose was solely for the trade of the company incurring the expense. See:

Marshall Richards Machine Co Ltd v Jewitt [1956] 36TC511 BIM37790
   
Vodafone Cellular Ltd & Others v Shaw [1997] 69TC376 BIM38220
Garforth v Tankard Carpets Ltd [1980] 53TC342 BIM38210

Group service companies

Where a group service company incurs expenses on behalf of another group company or companies it may be carrying on a trade of providing a service to those companies, subject to the guidance at BIM20000 onwards.

Where the group service company is carrying on a trade and where the company on whose behalf the services are performed is charged other than an arm’s length amount, the transfer pricing rules may apply - see INTM410000 onwards.

If the group service company is not carrying on a trade of which the provision of the services in question is part (and, in this context, see BIM80535 regarding a company carrying on more than one trade) then:

  • if it is carrying on a different trade the expenses are disallowable as a deduction in computing the profits of the group service company as they are not incurred wholly and exclusively for the purposes of its trade, or
  • if it is not carrying on any trade the ‘wholly and exclusively’ test has no application, in which case it might also be necessary to consider whether it is a company with investment business - see CTM08000 onwards and particularly CTM08180.

The following flowchart illustrates the process which should be followed in considering whether expenditure should be disallowed on ‘wholly and exclusively’ grounds (or not allowed as management expenses under S1219 Corporation Tax Act 2009 - see CTM08180) in situations where the transfer pricing rules would otherwise apply.

The flowchart (Word 110KB) applies when costs are incurred (or should be incurred) in the provision or receipt of intra-group services.

You may find it easier to follow the flowchart in this tabular form.

Question 1: Is the tested party the provider or recipient of the services? Provider - Go to Question 2
Recipient - Go to Question 3    
     
  Question 2: Is the provider carrying on a trade or a property business? Yes - Go to Question 4
No - Go to Question 5    
  Question 3: Is the recipient carrying on a trade or a property business? Yes - Go to Question 6
No - Go to Question 5    
  Question 4: Is provision of the services part of the provider’s trade or investment business or an adventure in the nature of trade in its own right? Yes - No prevention of a deduction for expenditure incurred by the provider. The transfer pricing rules have potential effect in respect of the amount charged by the provider.
No (extremely unlikely) - No deduction in computing trade profits or for management expenses.    
  Question 5: ’Wholly and exclusively’ test is not relevant. Is the tested party a company with investment business? Yes - If the tested party is the provider go to Question 4 and if the tested party is the recipient go to Question 6.
No - No deduction available as management expense. The transfer pricing rules may apply if the transaction relates to a chargeable source of income.    
  Question 6: Are the services used by the recipient wholly and exclusively for the purposes of its trade or management of its investment business?   Yes - No prevention of a deduction for the recipient for any payment due to the provider for the services. The transfer pricing rules may apply in respect of the amount charged to the recipient. 
No - No deduction in computing trade profits or as management expenses for the recipient for any payment due to the provider for the services.