Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperexclusively’ rule under the UK income tax system. 203 As noted in theintroduction, this Report is not intended to provide a comprehensive listof possible alternatives to the ‘wholly and exclusively’ deductibility rule.However, in the next section, it examines an alternative, moreeconomically ‘efficient’ reasonable business expenses rule, whichcombines two possible solutions, namely the use of dissection andapportionment. Dissection rules are akin to Griffith’s ‘excess cost’mechanism in disallowing the personal consumption components of mixedbusiness expenditures. The application of apportionment rules (similar toGriffith’s ‘allocation of costs’ method), which tend to promote moreeconomically efficient outcomes, is further considered in the context ofthe tax regime of a Commonwealth country. 204203204Such as apportionment of expenses, as discussed below: see John Tiley,Revenue Law, ibid, p. 424.Viz., Australia.Bode OyetundePage 38 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion paper4. ALTERNATIVES TO THE ‘WHOLLY & EXCLUSIVELY’ RULE4.1. DETERMINING THE BOUNDS OF A REASONABLE BUSINESS EXPENSESRULEThe foregoing sections have highlighted the practical and theoreticalproblems posed by the ‘wholly and exclusively’ rule. Inequitable resultsproduced in the case law illustrate some of the hardships the ‘all ornothing’ nature of the rule causes. Some commentators laud the sensibleapplication of the duality rule by Inspectors of Taxes, and the use ofpartial claim compromises 205 to avoid some of the absurdities a slavishapplication of the rule may produce. 206 However, this commonsense,practical approach may lead to anomalies and differing applications totaxpayers in similar situations, causing inequities, reducing clarity andmaking the regime more opaque. A more comprehensive solution isrequired, which reduces distortions across various kinds of economicentities and activities.A possible solution may be to frame the deductibility rule along the linesof a ‘but for’ reasonable business expense test, such that all expenseswhich would not be incurred but for the need to promote business endsshould be deducted, irrespective of whether these are incurred togetherwith other expenses which promote private ends. As indicated in the nextsection, this rule could be easily implemented in relation to aggregatedbut discrete mixed purposes transactions. However, it may prove to beinadequate in dealing with the problems posed by integrated mixedpurpose expenditures.205206Between the taxman and the taxpayer, provided the latter’s case does notinitially claim part of the controversial expenditure and so fall into theduality trap: see the observation of Ploughman J in Murgatroyd (Inspector ofTaxes) v Evans-Jackson [1967] 1 All ER 881 at p. 887.Particularly as regards clothing expenses for entertainers and other dualpurpose expenditure: see Robert W. Maas, Taxation of Employments, op cit,pp. 111, 113.Bode OyetundePage 39 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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