Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperabsence of any express prohibition, considering that “the right to deductis inferred from the fact that it is the profit, not the receipts, of a tradethat are taxed”. 6 The statutory requirement has evolved into the currentform as embodied in the Income Tax (Trading & Other Income) Act 2005 7which provides, as regards deductibility of expenses, that: “in calculatingthe profits of a trade, no deduction is allowed for (a) expenses notincurred wholly and exclusively for the purposes of the trade, or (b)losses not connected with or arising out of the trade.” 8 As regards theadverb ‘wholly’, although it has been conceded 9 that the word relates toquantum of the expenditure and ‘exclusively’ to the underlying motive, 10this view has been criticised by some commentators, 11 and it wouldappear that the word ‘wholly’ adds little, if any, additional import to the‘exclusively’ concept. 12 As will be seen, the underlying concepts of whatshould represent taxable income, and the appropriate formulae fordetermining the tax base, inform the statutory and case law tests of whatconstitutes deductible expenses.1.2.2.2. B ASIC PRINCIPLES AND CASE LAW DEVELOPMENT 13Certain principles underscore the UK rules on the deductibility ofbusiness expenses, borne out of the application of the statutory rules678910111213John Tiley (2005) Revenue Law, 5 th ed. (Hart Publishing: Oxford-Portland,Oregon), p. 417.Hereafter, the ITTOIA 2005.§34(1) ITTOIA 2005, emphasis added.Albeit obiter.By Romer LJ, in Bentleys, Stokes & Lowless v Beeson 33 TC 491; [1952] 2All ER 82; at pp. 503, 85 respectively.John Tiley, Revenue Law, ibid, p. 419.As this literal interpretation would preclude the dissection of a singlepurchase of several discrete items, for both business and private purchases,and the attribution of separate purposes as appropriate: see RogerKerridge, Deductibility of Expenses for Schedule D Income Tax – The “All orNothing” Rule, [1986] B.T.R. p. 36 – 39. See also John Ward, “All orNothing”: More Than Nothing at All [1987] B.T.R. 142, footnote #7.See generally, John Tiley, Revenue Law, op cit, §22 et seq, p. 417 – 427.Bode OyetundePage 4 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion paperthrough case law. Generally, these indicate 14 that only those expensesthat are proximately and entirely connected with and incurred in aid of theincome earning, 15 business-oriented 16 process would be tax deductible, inthe absence of any express prohibitions under applicable statutory rules 17or public policy. 18 Similarly, expenses that are of a capital nature, not onrevenue account 19 or which are considered a distribution or division ofprofits 20 are disallowed. A trio of cases exemplifies the approach of thecourts to the task of setting out the rules underpinning the application ofthese principles in the determination of deductibility of businessexpenses. These decisions, of the House of Lords 21 and the Court ofAppeal, 22 appear to set out four basic rules. 23First, the relevant outlays must be exclusively incurred to benefit thepurposes of the trade, not the trader, 24 and the query whether theseoutlays were incurred wholly to serve the purposes of the trade is aquestion of fact based on the evidence before the court. 25 Secondly, thecourt in determining the object of the taxpayer in making the expenditure141516171819202122232425John Tiley, Revenue Law, ibid, p. 419.See the dictum of Lord Davey in the celebrated case of Strong & Co. ofRomsey Ltd v Woodfield [1906] AC 448 at 453; 5 TC 215 at 220.However, in the view of Viscount Cave L.C. voluntary expenditure laid out toindirectly facilitate business operations, though not yielding immediate ordirect benefits, could nevertheless be held to meet the wholly andexclusively test: see British Insulated & Helsby Cables Ltd. v Atherton[1926] AC 205 at 211.Such statutory prohibitions include those disallowing the deduction ofcertain penalties, interest and VAT charges (see §54 ITTOIA 2005).Statutory prohibitions on business gifts and entertainment expenses areconsidered in greater depth in §2.5.2 below.See McKnight v Sheppard [1999] STC 669.See §33, ITTOIA 2005. See also §28, ITTOIA 2005 and the CapitalAllowances Act 2001 which provide for capital allowances in respect ofcertain capital expenditure. See generally, John Tiley, Revenue Law, op cit,§22.4.See Eyres v Finnieston Engineering Co. Ltd. (1916) 7 TC 74; see also UtolLtd. v IRC [1944] 1 All ER 190 and Walker v IRC [1920] 3 KB 648.Viz., Mallalieu v Drummond [1983] STC 124, CA; [1983] STC 665, HL;McKnight v Sheppard [1999] STC 669, HL.Viz., Vodaphone Cellular v Shaw [1997] STC 734, CA.See John Tiley, Revenue Law, op cit, p. 419 – 420.Vodaphone Cellular v Shaw [1997] STC 734, CA, per Millet LJ at p. 742.Mallalieu v Drummond [1983] STC 124, CA; [1983] STC 665, HL.Bode OyetundePage 5 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
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