BIM37060 - Wholly & exclusively: how to establish purpose: purpose is a question of fact
The expenditure must be incurred for the purpose of earning the profits
The meaning of ‘
for the purposes of the trade ’
is considered in several cases. Two important ones of which are
Smith’s Potato Estates Ltd v Bolland [1948] 30TC267 and
Rushden Heel Co Ltd v Keene [1948] 30TC298.
Smith’s Potato Estates Ltd incurred legal and
accountancy expenses in connection with a successful Excess Profits
Tax appeal. The company contended that the purpose of the appeal
was to retain the services of a manager. The company’s claim
to deduct the costs was denied. Lord Porter considered the meaning
of the words ‘
wholly and exclusively laid out for the
purposes of the trade ’.
At the top of page 288 Lord Porter referred to the decision
in Strong & Co of Romsey [1906] 5TC215 (see
BIM37300), quoted Lord Davy’s
dictum (‘
those words…appear to me to mean for the
purpose of enabling a person to carry on and earn profits in the
trade’); and explained that Strong & Co of Romsey
was the starting point for deducing the principles at stake in
Smith’s Potato Estates. Lord Porter explained that the costs
incurred by Smith’s Potato Estates were not allowable because
they were not incurred to earn the profits of the trade but were
incurred for the purpose of ascertaining the quantum for
assessment. It does not matter that the tax in question is only
imposed on traders, the expenditure incurred was not an expense of
earning those profits, 30TC at the foot of page 289 and at the top
of page 290:
…it is said that…Excess Profits Tax differs inasmuch as it is imposed on a trader only and therefore the cost of ascertaining it is part of the trade. I do not accept this contention. It is true that a trader only is liable to pay it, but it is not payable by him as a trader. He pays as an individual, like any other individual, tax on the sum which he has earned as a trader.
Rushden Heel Co Ltd v Keene [1948] 30TC298 was also concerned with the costs of appeals against Excess Profits Tax. The Master of the Rolls, Lord Greene, explained the decision in Strong & Co of Romsey, 30TC towards the foot of page 316:
I find, however, in Strong and Company’s case what appears to me to be a clear answer to the present appeal. It is, I think, a matter not of dictum but of decision in that case that an expense is not deductible if it falls on a trader in some other character other than that of trader. This was the ground of the opinion of Lord Loreburn, LC, with which Lords Macnachten and Atkinson agreed.
This is the so-called ‘capacity’ test concerning
which there is more guidance at BIM37300.
In the case of Meredith v Roberts [1968] 44TC559 a solicitor
claimed the £573 costs of unsuccessful litigation. The
litigation concerned the solicitor’s claim for an allowance
from the Collector of Taxes for the costs of operating PAYE. The
Collector refused and to bring the matter for legal decision the
solicitor withheld a small sum of tax that he had deducted. The
solicitor’s claim to a payment commensurate with the work
undertaken failed in the courts. The solicitor claimed the costs of
the legal action in computing his Case II Schedule D profits. The
solicitor sought to persuade the court that the expenditure had
been incurred for the purpose of his profession. The solicitor said
that he wished to relieve his staff of the burden of operating PAYE
thus freeing up resources to be used for the purposes of the
profession. The court held that the litigation costs were not an
allowable expense. Goff J in the lower half of page 565 of 44TC
describes the solicitor’s arguments:
The case made by Mr. Rees [taxpayer’s counsel] then is simply that the object of this expenditure was to rid the Appellant and his staff of the obligation to devote time to complying with the PAYE. Regulations, so as to free them for the purposes of the profession, or that it had that result, and that it was therefore directly connected with the profession and certainly sufficiently indirectly so, and was for the purpose of carrying it on. The fact that success would benefit other employers is irrelevant: see the Tate & Lyle case 35TC367 (see BIM35570), at page 417, per Lord Reid. Whilst it was an obligation imposed on Mr. Meredith as an employer, that must be as a solicitor, because there was no evidence that he had any other appreciable number of private employees outside his business. In this regard he relies on a passage in the judgment of Diplock L, J. in Harrods (Buenos Aires) Ltd. v Taylor-Gooby (1964) 41TC450, at pages 468-9 [Goff J then refers to the passage quoted in BIM37300].
At the foot of page 566 of 44TC, Goff J explains that the important fact to be determined in this case was the purpose of the expenditure. Was the expenditure wholly and exclusively for the purposes of the profession?
…it is in my judgement not wholly immaterial to consider whether this expense was really incurred by Mr. Meredith as a solicitor carrying on that profession or in his capacity as employer and taxpayer. In the end, however, one comes back to the vital question on the facts of this particular case: was the expense incurred directly or indirectly for the purpose of carrying on the profession, and wholly and exclusively so?
Goff J found that the solicitor’s purpose in making the
expenditure was not to free up more time for the practice but to
obtain remuneration from the government for operating the PAYE
system and that the cost was not allowable. The normal costs of
operating PAYE are allowable. What the solicitor sought was
remuneration from the Inland Revenue for operating the then
relatively recently introduced PAYE system.
The case of Meredith v Roberts [1968] 44TC559 was very much
decided on its own facts. Payroll costs (wages, taxes, etc. and the
costs of calculating such) in respect of employees carrying out
their normal duties will usually be allowable. It should only be
necessary to question a payroll deduction where, for example,
employees are engaged on matters outside their normal duties (for
example constructing a fixed capital asset such as a building used
in the trade – the employee’s wages would then be
capital).
