Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperinto (non-deductible) personal consumption and (deductible) incomeearning constituents based on the relative amounts of personal orbusiness value generated. A third option is the ‘personal consumption’approach 194 , where deductibility of mixed expenditures is limited toinstances of actual cost exceeding any personal benefits; however, bothpersonal and business values generated by the expenditure are taxed.Griffith’s solutions, however, depend on varying informationalrequirements and result in different distribution effects – factors that taxpolicymakers should consider well, matching the available informationwith the mode of taxation adopted in order to promote more efficientexpenditures.3.3.3. PRACTICAL LIMITS ON THE IMPLICATIONS OF OPTIMAL TAX THEORYAny insights drawn from optimal tax and other theories are only as goodas their practical applications in resolving difficulties posed by mixedpurpose expenditures in any given tax system. The tax system itself andits mode of administration may impose significant restraints on theusefulness of these approaches. Indeed, Edgar notes that thesesophisticated models depend on a precise assessment of the respectivevalues of business and personal constituents in any mixed expenditureand underlying drivers for the decision to make the outlay. In the absenceof any definite manner of determining these, ‘rough judgments’ must bemade in assessing such motivations and values and “… an appropriatetaxation method can only be applied based on those judgements”. 195The difficulty of the UK courts in arriving at a consistent body of such‘rough judgments’ is exemplified by the state of case law 196 , which has194195196Which corresponds to that under Halperin’s analysis: see Tim Edgar (1997)The Concept of Taxable Consumption and the Deductibility of Expensesunder an Ideal Personal Income Tax Base, op cit, p. 312.Tim Edgar (1997) The Concept of Taxable Consumption and theDeductibility of Expenses under an Ideal Personal Income Tax Base, op cit,p. 313.Reviewed above.Bode OyetundePage 36 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion paperbeen characterised as obscure, inconsistent and generally inequitable byKerridge 197 and clear-cut, uniform and generally inequitable by Ward 198 .This leads Edgar to conclude “… a certain degree of theoretical puritymay legitimately be abandoned because of administrative exigenciesnecessitated by a need to prevent abusive deduction claims. The costmay well be an income tax system in which efficient mixed expenses arediscouraged … Tax policymakers in all countries must make their owndecisions in the areas of employment and business income without anyuseful guidance from the dictates of a (comprehensive tax base).” 199A more pervasive challenge stems from the fact that many of theanalyses of these commentators 200 have greater applications under theglobal system of income taxation adopted by many countries, includingthe United States. These global systems aggregate revenue under asingle schedule regardless of its source, seek to effect an ability to payapproach to vertical and horizontal equity and have resulted in a widertax base where adopted.201However, the UK’s schedular system oftaxation differs significantly in assessing to tax income based on sourceof income categories, raising the possibility of horizontal and verticalinequities. 202 Unless greater consistency is desired with these globalincome systems, the benefits of these approaches to the deductibility ofexpenses may not be realised, and more pragmatic solutions may benecessary to reduce the inequalities occasioned by the ‘wholly and197198199200201202Roger Kerridge, Deductibility of Expenses for Schedule D Income Tax – The“All or Nothing” Rule, [1986] B.T.R. p. 36.John Ward, “All or Nothing”: More Than Nothing at All [1987] B.T.R. 141.Tim Edgar (1997) The Concept of Taxable Consumption and theDeductibility of Expenses under an Ideal Personal Income Tax Base, op cit,p. 315.Viz., Klein, Halperin, Griffith and Edgar.Kevin Holmes, (2000) The Concept of Income: A Multidisciplinary Analysis,op cit, pp. 28 – 30.Kevin Holmes, (2000) The Concept of Income: A Multidisciplinary Analysis,op cit, p. 28. See also Tim Edgar (1997) The Concept of TaxableConsumption and the Deductibility of Expenses under an Ideal PersonalIncome Tax Base, op cit, p. 299.Bode OyetundePage 37 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
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