Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperis not limited to any conscious motives of the taxpayer at the time of thepayment, 26 but must (except in obvious, self-evident cases which speakfor themselves) go further, to examine the taxpayer’s subjectiveintentions operating at the time when the expenditures were made. Thecourt, having considered any significant and not incidental consequenceswhich are so inevitably and inextricably involved in the expenditure, mayconclude that these subjective intentions were the real purposesmotivating the expenditure. 27 For corporate taxpayers, the courts maypierce the veil of incorporation in seeking to discover the subjectivepurposes of its directors and shareholders in making the expenditure. 28Thirdly, the court may distinguish an ancillary, secondary ‘object’ of aspecific expenditure operating contemporaneously with a primary ‘object’from a mere, incidental ‘effect’ of the expenditure, such that, while thepresence of a secondary ‘object’ would disqualify the expenditure fromdeductibility (as a dual purpose would be served), the existence of suchan incidental ‘effect’, provided it is a consequential and incidental effect,would be merely fortuitous and not a ground for disqualification. 29 Finally,the tribunal of fact should first determine what was the principal purposefor the taxpayer in making the expenditure as a matter of fact (whetherarticulated clearly or not), and then attribute personal or businessmotivations to this purpose based on conclusions drawn from the facts.The question to be answered was consequently not whether the taxpayerconsciously sought to further a personal or business advantage byincurring the expenditure, but rather what was his principal purpose inmaking the expenditure. 3026Mallalieu v Drummond [1983] STC 124, CA; [1983] STC 665, HL.27Vodaphone Cellular v Shaw [1997] STC 734, CA, by Millet LJ at p. 742. Seealso MacKinlay v Arthur Young [1986] STC 491, by Lord Oliver at p. 504;and McKnight v Sheppard [1999] STC 669, HL.28 Thus, the mere fact that articles and resolutions stipulated that certain sumswere to be charged as remuneration was not determinative that such sumswere wholly and exclusively laid out for the purposes of the company’strade: see Copeman v William Flood & Sons [1941] 1 KB 202; 24 TC 53.29Mallalieu v Drummond [1983] STC 124, CA; [1983] STC 665, HL.30Vodaphone Cellular v Shaw [1997] STC 734, CA, per Millet LJ at pp. 742 –745.Bode OyetundePage 6 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion paper1.2.3. DEDUCTIBILITY OF EMPLOYMENT INCOME EXPENSES 31As regards taxation of employment income, the law has evolved from itsorigins in the Napoleonic wars, 32 through numerous other changes, 33 tothe present income tax regime. Specific provisions exist for the deductionof expenses incurred by an employee in the course of his employment,particularly in instances where the employer is unable or unwilling toincur these expenses for the employee by trade usage, custom oragreement between the parties. The relevant statutory provisions arefound in the Income Tax (Earnings and Pensions) Act 2003, 34 and providegenerally that deductions are allowed for an amount from an employee’searnings provided the employee is obliged to incur and pay it as theholder of employment and such expenses are incurred wholly, exclusivelyand necessarily in the performance of employment duties. 35 Similar 36deductions are allowed for expenditure on travel in the performance ofduties 37 and travel for the necessary attendance at any place in theperformance of duties. 383132333435363738See generally, John Tiley, Revenue Law, op cit, §18 et seq, pp. 327 – 344.In 1799 and again in 1842: see Robert W. Maas, Taxation of Employments,11 th ed., (2005, West Sussex, Tottel Publishing), p. 1.Such as the introduction of deductions for expenses by the Income Tax Act,1853 and Schedule E taxation on income from employment and pensions bythe Finance Act of 1922.Hereafter, ITEPA 2003. The ITEPA 2003 is essentially a restatement of thelaw as it stood under Schedule E of the Income and Corporation Taxes Act1988 (hereafter, ICTA 1988) pursuant to the Inland Revenue’s Tax LawRewrite Project. The main changes have been the use of simpler language,the disuse of the expression “Schedule E” and the replacement of theschedular system with tax on income from employment, pensions and socialsecurity. As such, no substantial changes have been made and previousinterpretative case law is largely applicable. See John Pearce’s article,ITEPA 2003 – an introduction, available athttp://www.tax.org.uk/attach.pl/1866/672/John%20pearce.pdf. See also JohnTiley, Revenue Law, op cit, pp. 327 – 329.§336, ITEPA 2003.As in both these cases, the employee must be obliged to incur travelexpenses as the holder of employment.See §337, ITEPA 2003.See §338, ITEPA 2003.Bode OyetundePage 7 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
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