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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Corporation Tax: management expenses: unallowable purpose - business or commercial purpose test

The business or commercial purpose test as originally enacted in FA04 ensures that expenses related to investments held by a company for social or recreational purposes (other than for the benefit of employees of the business) can not be deducted as expenses of management (see examples below).

In addition, from 20 June 2007, ICTA88/S75(5A) spells out that tax avoidance is not a commercial or business purpose of the company. Where the purpose of holding investments is tax avoidance then any expenses incurred in managing those investments will not be expenses of management within the meaning of Section 75. There is a further explanation of the various definitions at CTM8234+.

The original text in Section ICTA88/S75 (5)(a) would, for example, normally apply to disallow any expenses incurred by a company in managing investments in a football club supported by one of the directors. But if the purpose of the investment included a commercial or other business purpose such as advertising, then this would be taken into account in arriving at the amount attributable to the unallowable purpose on a just and reasonable basis (the new Section 75 (10)).

The ICTA88/S75(5) test can also be in point in the unusual case of an asset, which can be viewed as an investment but which also generates some private benefit to the shareholders of a company, such as a yacht, and which does not, for example, form part of a director’s remuneration. That said, in the case of most investments of a company existing for commercial purposes it is difficult to envisage any non-commercial purpose for which the investments may be held (other than for tax avoidance).