BIM37007 - Wholly & exclusively: overview
Three important issues
Not everything charged in the profit and loss account of a
trade, profession or vocation is an allowable deduction for tax
purposes. For example, you add back depreciation when you compute
the taxable profits.
ICTA88/S74 (1)(a) prevents a taxpayer deducting expenditure
in computing their profits under Case I/II Schedule D unless it is
incurred wholly and exclusively for the purposes of the trade,
profession or vocation.
The following guidance describes how the statutory
restriction works. You should note the following points.
Sole purpose
The legislation disallows any expenditure not incurred wholly
and exclusively for the purposes of the trade, profession or
vocation. This means that the rule is only satisfied if the
taxpayer’s
sole purpose for incurring the expense is for the
purposes of their trade, profession or vocation. If you identify a
non-trade purpose then the expenditure is not allowable. This
remains the case even if there is also one or more business reasons
for making the expenditure.
Dual-purpose expenditure is expenditure that is
incurred for more than one reason. If one of the reasons is not for
business purposes, the expenditure fails the statutory test and
there is no provision that allows a ‘business’
proportion. But see the comments below concerning expenditure where
an identifiable part or proportion is wholly and exclusively for
the purposes of the trade, profession or vocation.
For further discussion of duality of purpose see
BIM37600 onwards.
Incidental benefit
You need to exercise care when applying the test in ICTA88/S74
(1)(a). Where a taxpayer incurs an expense wholly and exclusively
for the purposes of their trade, profession or vocation an
incidental benefit may arise. Such an incidental benefit does not,
of itself, mean that the expenditure is disallowed.
For example a self-employed consulting engineer may travel to
exotic locations to advise on projects. The travel and the exotic
locations may be benefits but where there was no private purpose
they are incidental to the carrying on of the profession and the
cost is allowable.
For further guidance see
BIM37400.
Apportionment and duality
When you consider the application of ICTA88/S74 (1)(a), it is important that you distinguish between cases where:
- A definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation. That part or proportion should not be disallowed on the ground that the expense is not as a whole laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation.
- An expense has been incurred for a dual purpose. Such expenditure should be disallowed.
For expenditure satisfying (a) above, there are classes (for
example motor expenses, use of home as office), where the pattern
of usage lends itself to a statistical approach. A detailed review
for a representative period can be used to establish the amount of
the total expenditure that is deductible. This allows you to
determine the proportion of the expenditure in the representative
period that is deductible. It is sensible to continue to use this
proportion until the underlying circumstances change.
For further guidance see
BIM37600.
