Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paper2. JUDICIAL R ATIONALES FOR & DEVELOPMENT OF THE ‘WHOLLY &EXCLUSIVELY’ DEDUCTIBILITY RULE2.1. OVERVIEWThis section considers the role of judicial precedent in developing the‘wholly and exclusively’ rule for deductible expenses in relation totaxation of business and employment income. While judicial precedent setby the courts in grappling with the difficulties posed by the ‘wholly andexclusively’ rule has been crucial in its development and application toparticular categories of expenses, many decisions have led to inequitableoutcomes and obscure, inconsistent precedent, 74 depending on one’sperspective. 752.2. MALLALIEU V DRUMMONDThe leading authority is the case of Mallalieu v Drummond (Inspector ofTaxes), 76 where the taxpayer, a practising barrister, argued that she wasentitled to deduct from her taxable professional income sums expendedon replacing, cleaning and laundering certain items of clothing, procuredand maintained by her in compliance with the Bar Council’s professionalguidance on professional attire. The ‘wholly and exclusively’ test wasembodied in provisions which permitted only such “disbursements orexpenses, not being money wholly and exclusively expended for thepurposes of the trade, profession or vocation” 77 to be deducted. The74757677Roger Kerridge, Deductibility of Expenses for Schedule D Income Tax – The“All or Nothing” Rule, [1986] B.T.R.cf. John Ward, “All or Nothing”: More Than Nothing at All [1987] B.T.R. p.141, where the author argues that the case law, though inequitable, islargely clear-cut and uniform.[1983] STC 124, CA; [1983] STC 665, HL.§130 (a) Income and Corporation Taxes Act 1970 (which corresponds to §74of the Incomes and Corporation Taxes Act 1988).Bode OyetundePage 12 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion papertaxpayer’s contention was upheld. 78 Slade, J held that there was noevidence that the taxpayer had a dual purpose for incurring theexpenditure, and that the test revolved about the subjective motive of thetaxpayer when making the disputed expenditure. Consequently, theincidental purposes of meeting the non-professional, human needs ofbeing decently and warmly clothed were irrelevant. 79 As the taxpayer “…aimed at the professional bird and fortuitously, fortunately, accidentallyor incidentally hit the non-professional bird, the expenditure wasdeductible”. 80 Indeed, it was noted 81 that the General Commissioners’finding of fact that the taxpayer had no conscious dual 82 purpose in mindwhen making the relevant payments led inevitably and inescapably to thedeductibility of these expenses as being of a professional nature. TheCourt of Appeal agreed. 83However, on appeal to the House of Lords, the majority 84 allowed theCrown’s appeal and held that the expenses were not deductible. In theleading judgment, Lord Brightman 85 held that, while the taxpayer’s motivein making the outlay was of vital significance and must be discovered,any conscious motive expressed would not deter the courts fromdetermining her true objective which, on the facts, extended to theobvious need for the taxpayer as a human being to be warmly anddecently clothed in public. 86 The existence of an associated privateadvantage was not conclusive. In distinguishing between the privatepurposes of the taxpayer and the business purposes of the trade,78 Per Slade J, reversing the decisions of the inspector of taxes and GeneralCommissioners respectively disallowing deductibility and dismissing thetaxpayer’s appeal against this: [1981] STC 391; [1981] WLR 908.79[1981] STC 391 at 406; [1981] WLR 908 at 921, per Slade J.80Per Sir John Donaldson MR, [1983] STC 124 at 129, CA.81By Lord Elwyn-Jones in his dissenting decision in the House of Lords:[1983] 665 at 667, HL.82That is, both professional and private.83[1983] STC 124, CA.84With Lord Elwyn-Jones dissenting, as noted above.85[1983] STC 665 at 667, HL.86Though this was conceded not to be in the contemplation of the taxpayer atthe relevant time on the facts.Bode OyetundePage 13 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
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Reasonable Business Expense - The Chartered Institute of Taxation

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