Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperHarward 126 illustrates the difficulties faced by the courts in rationalisingtheir decisions in factual circumstances where both private and businessends are served by expenditures. Here, the possibility of apportionmentin these cases may be welcome and yield more wholesome results.Indeed, apportionment has limited application in VAT-related businessentertainment expenses, as is highlighted in the next section.2.5.2. VAT & NON-VAT ‘BUSINESS ENTERTAINMENT’ EXPENDITUREGenerally, outlays for the provision of business entertainment 127 aredenied deduction under certain statutory prohibitions. Specific rules applyto corporate business entertainment expenses 128 and businessentertainment expenses vis-à-vis business income 129 as well asemployment income. 130 In Associated Newspapers Groups Ltd vFleming 131 , the House of Lords construed certain obscure 132 provisions 133prohibiting business entertainment expenditures except where these were“expenses incurred in … the provision by [the taxpayer] of anything whichit [was its] trade to provide”. 134 The taxpayer, a newspaper publisher, had12612712812913013113213313458 TC 468; [1985] STC 451; [1985] WLR 994; [1985] 2 All ER 916: seebelow at §4.2This phrase is defined as inclusive of hospitality of any kind: see §45(3)ITTOIA 2005; §356(3) ITEPA 2003; and §577(5) Income and CorporationTaxes Act 1988. See also Romer LJ in Bentley, Stokes & Lowless Beeson[1952] 2 All ER 82 at 84.See §577, Income and Corporation Taxes Act 1988.See §45 – §47, ITTOIA 2005. Exceptions exist for expenses incurred in theprovision of entertainment which is in the trader’s business to provide, if forpayment in the ordinary course of trade or gratuitously with the objective ofgeneral, public advertisement. Where employees are entertained,attributable expenses are deductible provided non-employees are excludedand do not benefit from the entertainment. Similar exceptions apply tobusiness gifts.Subject to certain exceptions vis-à-vis general entertainment allowances:see §356 – §358 ITEPA 2003. See generally, John Tiley, Revenue Law, opcit, §22.6.3.[1972] 2 All ER 574, HL.In the opinion of the Lord Reid; see at pp.580 and 582.Similar to the present wording of §46(2) ITTOIA 2005 and §577(10) Incomeand Corporation Taxes Act 1988.§15(1)(a) Finance Act 1965.Bode OyetundePage 22 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion paperincurred certain sums 135 in the provision of hospitality by way of mealsand drinks provided at restaurants and hotels by its journalists to theircontacts, informants and contributors. Experience had shown that suchbusiness entertainment was often necessary in procuring the informationon which the taxpayer’s news and feature articles were based. Thetaxpayer sought to deduct these sums, contending that they wereincurred in the provision of newspapers, which were in its trade toprovide. The House of Lords, in affirming the Court of Appeal’s decision,distinguished between expenses incurred in the provision of newspapersand those incurred in the provision of entertainment. The former relatedto the trade of the taxpayer; the latter, though wholly and exclusively laidout for the purpose of the taxpayer’s trade, were not. 136 As such, theexpenses were not deductible. 137These provisions 138 are noteworthy as they were considered to belegislative solutions to the exploitation of the then generous ‘wholly andexclusively’ rule by excessively lavish business entertainmentexpenditure. Such abuse was frowned upon by Parliament due to theimplicit element of reciprocity involved, 139 and as it encouraged traders toentertain business associates (and indeed themselves) at the publicexpense. 140 Interestingly, the quantum of the disputed sum in this case(£67,143.00) was considered not to be excessive and it was concededthat, but for the statutory prohibition, it would have been allowable as adeduction. 141 This was notwithstanding the evident difficulty the courtspeculated that the Revenue would have in separating “entertainment135136137138139140141£67,143 to be precise.By Lord Morris of Borth-y-Gest at p. 584.Indeed, it would appear that unless the entertainment is supplied by thetaxpayer himself, not merely by another supplier in his line of trade, theexpenditure may not be deductible under these statutory prohibitions: seeJohn Tiley, Revenue Law, op cit, p. 451.§15(1)(a) Finance Act 1965; §46(2) ITTOIA 2005 and §577(10) Income andCorporation Taxes Act 1988.As noted by Lord Simon of Glaisdale at p. 586.Noted by Lord Reid at p. 578.Being wholly and exclusively laid out for the purpose of the trade, consistentto the practice of newspaper publishers at that time.Bode OyetundePage 23 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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