Reasonable Business Expense - The Chartered Institute of Taxation

Reasonable Business Expenses: Discussion paper3. ACCOUNTING AND ECONOMIC CONCEPTS OF INCOME AND EXPENDITURE3.1. OVERVIEWThe foregoing section has considered the development of judicialprecedent on the deductibility of expenses under the ‘wholly andexclusively’ rule. Concepts of accounting and economic income haveinfluenced the approaches of the courts and tax policymakers indetermining the bounds of the ‘wholly and exclusively’ deductibility rule.Accounting concepts and economic theories provide significant insightsinto the concept of taxable income and the role of the wholly andexclusively deductibility rule in determining the tax base for incometaxation.3.2. ACCOUNTING INCOME AND THE DEDUCTIBILITY OF EXPENSESAccounting rules and concepts have traditionally played a significant rolein this area of UK tax law, as indicated by Jenkins, LJ’s statement inMorgan (Inspector of Taxes) v Tate & Lyle Ltd to the effect that: “… it haslong been settled that the effect of these provisions as to deductions isthat the balance of the profits and gains of a trade must be ascertained inaccordance with the ordinary principles of commercial trading, bydeducting from them the gross receipts of all expenditure properlydeductible from them on those principles, save in so far as any amount sodeducted falls within any of the statutory prohibitions contained in therelevant rules, in which case it must be added back for the purpose ofarriving at the balance of profits and gains accessible to tax.” 166 As such,in matters of the ascertainment of taxable profits, recourse wouldnormally be had to the principles of commercial accountancy. This hasbeen applied in UK case law, as illustrated in the pre-Finance Act 1998166[1953] 2 All ER 162 at 175; [1953] Ch. 601 at 627, CA.Bode OyetundePage 30 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College