BIM37035 - Wholly & exclusively: statutory background: the statutory prohibition
Expenditure must be incurred wholly and exclusively for purposes of the trade - ICTA88/S74 (1)(a)
The statute has, from the earliest days, included a rule
restricting deductions to those incurred wholly and exclusively for
the purposes of the trade. The words used have been subject to very
little alteration over the years.
The current form of words is in ICTA88/S74 (1), which
provides:
Subject to the provisions of the Tax Acts, in computing the amount of the profits to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of –
(a) any disbursements or expenses not being money wholly and exclusively laid out for the purposes of the trade, profession or vocation;…
Not all payments are capable of satisfying this statutory test. A two-stage approach is required.
- First, you need to establish if the expense is capable of satisfying the statutory rule. This is a question of law.
- Second, having established that the expense is capable of satisfying the statutory rule, you must establish if it was incurred wholly and exclusively for the purposes of the trade. This is a question of fact.
It is therefore essential that you fully establish the facts before entering into discussion as to whether the particular deduction being claimed satisfies the statutory test in ICTA88/S74 (1)(a), see BIM37065.
Lord Reid explained the approach in CIR v Dowdall O’Mahoney & Co Ltd [1952] 33TC259. A UK company claimed to deduct Irish Tax in computing its liability to Excess Profits Tax. The company was successful before the Commissioners. Through the courts the company argued that it was a question of fact whether expenditure was incurred wholly and exclusively for the purposes of the trade; concerning which the Commissioners’ decision was final and so concluded the matter. Lord Reid would have none of this argument. He explains the correct approach at page 276 and 277 of 33TC:
The relevant Rules in this case are the Rules
applicable to Cases I and II: ‘[what is now
ICTA88/S817(1)]
The tax shall be charged without any other
deduction than is by this Act allowed’, and
‘[what is now ICTA88/S74 (1)(a)]
In computing the amount of the profits or
gains to be charged, no sum shall be deducted in respect of (a) any
disbursements or expenses, not being money wholly and exclusively
laid out or expended for the purposes of the trade, profession,
employment, or vocation’. So it is necessary to determine
whether any part of the Irish taxes paid by the Respondents can in
law be regarded as money wholly and exclusively laid out or
expended for the purposes of the Respondents' trade.
It was argued for the Respondents that this is
a question of fact and that therefore the decision of the
Commissioners on this matter is final in their favour. I cannot
accept this argument. If certain payments made by a taxpayer are of
such a kind that they are capable in law of being regarded as
coming within the exception in [what is now ICTA88/S74
(1)(a)]
then no doubt it is for the Commissioners to
determine whether the circumstances of the case are such that in
fact they do come within that exception. But it is in my judgement
a question of law whether particular payments are of a nature
capable of coming within the exception, and that is the issue
here.
Lord Reid took the view that the Irish tax was a tax on profits.
That the tax arose after profits had been earned and was not an
expense incurred in earning the profits. Therefore the tax could
not by its nature be an expense deductible in arriving at the
profits for UK tax.
The same question arose in Boarland v Kramat Pulai Ltd [1953]
35TC1. The case concerned a claim to deduct the costs incurred by a
company in publishing and circulating a political pamphlet entitled
‘Chairman’s supplementary remarks at annual general
meeting’. The pamphlet carried criticism of the policies of
the government of the day. The Commissioners decided in the
company’s favour but in the High Court Dankwerts J reversed
their decision, saying at page 14 of 35TC:
It seems to me that it is a question of law on the authorities whether a pamphlet in this particular form is capable of being wholly and exclusively for the purposes of advancing the trade of the company…
Dankwerts J goes on to say that one only had to peruse the
pamphlet to see that if it had a trade purpose, as contended by the
company, such was not the only purpose. Dankwerts J says that he is
entitled to hold as a matter of law that the expenditure was
incapable of satisfying the statutory test.
The long duration of the legislation in essentially unchanged
form has produced a great deal of case law, which is still
applicable today. You will discover from the cases the importance
of establishing evidence as to purpose. Where an expenditure, as a
question of law, is capable of satisfying the statutory requirement
then to deny a deduction you will need to establish to the
Commissioners’ satisfaction that there was a non-trade
purpose (or that the expenditure was of a class where an intrinsic
non-trade purpose can be assumed - see
BIM37900).
It is a general principle that the construction of words in a
statute is, in the first instance, a question of law. But where the
words of the statute are words in common usage, it becomes largely
a question of fact whether those words apply to a particular
situation. It is therefore essential in wholly and exclusively
cases that you fully establish and consider all of the relevant
facts.
