Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperSometimes it is either impossible or implausible to separate out ancillaryexpenditure relating to non-business entertainment expenses.Consequently, tax on the whole amount incurred would be deductible. Forinstance, in DPA (Market Research) Ltd, 156 the taxpayer, a marketresearch company, was allowed to deduct tax on the cost of a Spartanmeal of sandwiches and bread and cheese accompanying theconsumption of alcoholic beverages as part of a questionnaire test ofparticipants’ views on the alcoholic drinks. While the supply of thealcoholic drinks was clearly part of the business of the company, theCommissioners queried the deductibility of tax relating to the supply offood to participants. It was held that the basic meal was a necessary partof the provision of the alcoholic drinks under the particularcircumstances. Tax on the meals was also deductible.In other instances, it is permissible to apportion the tax on theexpenditure, deducting that relating to clearly business purposes andexcluding that relating to business entertainment. For instance, inMacDonald & Muir Ltd, 157 the tribunal rejected the Commissioners’argument that apportionment was not permitted under Article 5(1) of theInput Tax Order, and held that 70% of the input tax on premises used fordual business administration and entertainment purposes (butpredominantly for the former) was properly deductible. The Court ofAppeal has specifically approved apportionment in deserving cases, 158and this practice has been applied in several other decisions. 159 In DLumby, 160 apportionment was applied in a particularly ‘rough and ready’fashion. Here, the promoter of a rock concert claimed to have provided9,600 free alcoholic beverages to 370 persons attending the concert.While the tribunal was prepared to permit the deduction of tax relating to156157158159160LON/95/2837 (VTD 14751).EDN/92/208 (VTD 10947).See Thorn EMI plc v Customs and Excise Commissioners [1995] STC 674,CA.See BMW (GB) Ltd v Customs & Excise Commissioners [1997] STC 824 andKPMG (No. 2) [1997] VATDR 192 (VTD 14962).MAN/94/593 (VTD 12972).Bode OyetundePage 26 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion paperthe drinks, evidence indicated that the relatively small number ofcustomers and employees that attended could not have consumed all thealcohol supplied. As such, an apportionment was made on the balance ofprobabilities to limit the deductible tax to only 3,600 drinks, being a morereasonable and credible number. Consequently, the tribunal was sparedthe difficulty of applying an ‘all or nothing’ rule, avoiding inequity to boththe taxpayer and the taxman.Many of the cases considered above relate to unincorporated trades andbusinesses. Ascertaining the exclusive or predominant purpose forexpenditures is a difficult enough undertaking in partnerships and for soletraders, where the courts need only to assess the subjective motives ofthe real individuals involved. The task is more involved in dealing withartificial persons and entities such as corporations and corporate groups.2.6. DIFFICULTIES WITH CORPORATE GROUPS AND ASSOCIATED COMPANYEXPENSESVodaphone Cellular Ltd. v Shaw 161 illustrates the application of the ‘whollyand exclusively’ rule to corporate groups. The taxpayer was a company ina telecommunications group that sought to deduct expenses associatedwith the determination of liabilities under certain onerous agreements.The Special Commissioners disallowed this, considering that theexpenditure was made by the directors to benefit the group’sundertakings, and not incurred wholly and exclusively in aid of the tradeof the particular taxpayer company. Though this determination wasupheld by Jacob, J, on further appeal the Court of Appeal allowed theexpenditure to be deducted, holding that the Commissioners had erred intheir conclusions.161 [1997] STC 734, CA.Bode OyetundePage 27 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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