BIM37005 - Wholly & exclusively: topics covered

Introduction and layout of guidance

The profits of a trade, profession or vocation (see BIM14010), are charged to tax under Case I/II of Schedule D. To calculate those profits you need to determine:

• whether sums arising are taxable income of the trade, profession or vocation (see BIM14080), and
• the time at which receipts or expenses should be recognised - see BIM31090 onwards, and
• what deductions are allowable in computing the profits - see BIM42050 onwards.

By no means all of the expenditure incurred by a trader is allowable as a deduction in computing Case I/II Schedule D profits. There is no comprehensive list of allowable and disallowable expenditure. In general revenue expenditure is allowable unless there is a specific statutory prohibition. There are several pieces of legislation that either allow or disallow specific expenses. For example:

• ICTA88/S577 disallows the cost of entertainment - see BIM45000 onwards.
• ICTA88/S77 permits the deduction of certain costs of raising loan finance - see BIM45800 onwards.

There is also legislation that disallows classes of expenditure, for example ICTA88/S74 (1)(b) denies a deduction for:

Expenditure may be segregated into two broad categories.

Revenue expenditure

The day to day running costs of a business (staff wages, purchase of trading stock, rent of business premises, and so on) are referred to as revenue expenditure. Revenue expenditure is sometimes described as circulating capital. This description reflects the fact that the capital in question leaves the owner’s possession (changes masters) to produce profit or loss. The capital may be considered as being 'turned over'. In the process of turning over, profit or loss ensues.

Unless there is a specific statutory prohibition (of which ICTA88/S74 (1)(a) is the most commonly encountered), revenue expenditure is allowable.

Capital expenditure

Capital expenditure (goodwill, the purchase of business premises, plant and machinery used in the business process and so on) in practice is the opposite of revenue expenditure.

Unless specifically allowed by statute (for example ICTA88/S77 - see BIM45800 onwards), capital expenditure is not allowable.

There is detailed guidance on the capital/revenue divide at BIM35000 onwards.

The wholly and exclusively chapter covers the subjects listed below.