BIM37065 - Wholly & exclusively: how to establish purpose: a question of fact to be decided by examining the evidence
You need to obtain and review all available evidence
You need to obtain and consider all of the evidence (which
should include contemporaneous documents, agreements, notes of
meetings and any other records or documentation) to determine
whether an expense was laid out wholly and exclusively for the
purposes of the trade. The motive of the trader in incurring the
expense is an important part of the evidence. In a contentious
hearing on a wholly and exclusively point you should interview
potential witnesses and assess their accounts as evidence. You also
need to obtain any available independent documentary evidence.
To decide the issue you must establish the specific facts in
each case. If you are going to say that there is a non-trade
purpose you must (other than in the narrow class of cases where
there is an inevitable non-trade purpose - see
BIM37900) establish evidence to support
your view. In many cases a face to face meeting with the parties
directly involved may be the speediest way to establish the
purpose(s) of the disputed expenditure.
While the taxpayer’s evidence as to purpose is
important it is by no means conclusive. If the only evidence as to
purpose is what the trader says (or the directors of a company)
then the Commissioners may well find that they have to make a
finding of fact in accordance with that evidence. In reaching their
decision the Commissioners may, in addition to the evidence adduced
by the taxpayer as to their conscious motive, also take into
account all the surrounding circumstances. In Morgan v Tate &
Lyle Ltd [1954] 35TC367 (see
BIM35570), where the costs of an anti
nationalisation campaign were allowed, Lord Reid explains, at the
foot of page 415 of 35TC:
In the Case Stated the Commissioners set out fully the evidence which was before them and which they accepted, and then they state that they
‘found that the sum in question was money wholly and exclusively laid out for the purposes of the Company's trade’,
but they do not state specifically what the purposes were. The purpose of a person or of a board of directors in spending money is a pure matter of fact. It may be that it can only be ascertained by drawing an inference from other facts, but the Commissioners are entitled to draw inferences.
In the case of Robinson v Scott Bader Co. Ltd [1981] 54TC757 (see BIM38250) in the Court of Appeal Waller LJ discusses whether the test is subjective or objective and concludes that it depends on the circumstances, saying at page 771H to 772B:
…I will consider first the argument that the test is objective and not, as the Judge found, subjective. The phrase with which the Case is concerned is ‘for the purposes of’. In my judgment ‘purpose’ contains an ingredient of ‘intention’. It is very difficult, but perhaps not impossible, to determine this without some element of subjectivity. Indeed, in many cases the test will be wholly subjective. When deciding whether or not a solicitor is entertaining a client to lunch, the test must be wholly subjective. The solicitor is entertaining; it may be because it is an old client; it may be because it is the only opportunity to discuss the business. The court has to decide the real purpose, if it is for the trade, vocation or profession, and whether it is independent, i.e. independent of the business purposes to be served. (See Bentleys, Stokes & Lowless v Beeson [1952] 33TC491 at pages 504 - 505 - BIM37400.) It would be impossible in such a case to do other than make the decision subjectively. In considering the purposes of a company there may be room for some objectivity, but it will normally be to assist in making the subjective decision. There may be a case where the evidence shows that something was done in a different capacity altogether, e.g. Smiths Potato Crisps (1929) Ltd. v Commissioners of Inland Revenue 30TC267 (see BIM37850), where it was held that something done as a taxpayer could not be for the purposes of the trade, profession or vocation. In my opinion, in spite of Mr. Potter's [counsel for the Crown] submission to the contrary, that does not arise in this case.
Following Scott Bader it is at times argued that where a trader
or director of a trading company gives evidence as to purpose and
that evidence cannot be impugned then the argument is thereby
concluded in the taxpayer’s favour. This is not so as
demonstrated by the judgements in the two cases described below.
In the case of Joseph Thompson & Sons Ltd v Chamberlain
[1962] 40TC657 the company claimed to deduct the amount that it
subscribed to a trade association, the Economic League, that
distributed anti-socialist literature. Ungoed-Thomas J said that in
the case before him there was not the same direct evidence as to
purpose as there had been in Tate & Lyle. He goes on to say, at
page 669:
…even if there were such direct evidence, the ipse dixit of the Company would not necessarily establish the purpose. All the facts would have to be considered in reaching the conclusion whether, in reality, the payments were made exclusively for the purposes of the Company’s trade.
Ungoed-Thomas says that when considering ex gratia payments to
third parties, not exclusively for services, it may be most
material to consider the objects of the body to which the payment
is made. This is a useful point to remember when dealing with ex
gratia subscriptions and contributions.
In Garforth v Tankard Carpets [1980] 53TC342 (see also
BIM38210) the company had given security
by way of a guarantee in favour of an associate company. The
guarantee was called in and the company claimed as a trading loss
the expenditure it had to meet under the guarantee. Walton J
indicated that in such circumstances it would be extremely
difficult for the company to establish that the guarantee that it
gave was wholly for the purposes of its own trade and not at all
for the purposes of the company benefiting from the guarantee.
Walton J suggests that where the directors were common to both
companies it would take a superhuman effort of mind to distinguish
the purposes of one company from those of the other; that
Commissioners should be slow to accept that such an act was done
solely for the benefit of one company’s trade. They should do
so only where there are wholly separate findings of primary fact
not depending on the say-so of the directors concerned. So when
weighing the evidence of directors as to purpose you should bear in
mind Walton J’s remarks at the foot of page 349 and head of
page 350 of 53TC:
…it must in the nature of things be extremely difficult for any directors of two associated companies in the position of Carpets and JLT to be certain in whose best interests - or, rather, in whose exclusive interests - any step which they take is being taken. Obviously, there is nobody but themselves to say what was in their own minds; and obviously, again, it must require a superhuman effort of mind (of which extremely few persons, if any, are capable) to rule out entirely from consideration the possibility of benefit to one's other company when concentrating on the exclusive requirements of just one of them. In my judgment, Commissioners should be extremely slow in coming to any conclusion that the act was done solely for the benefit of the trade of one of the companies concerned and should in general do so only where there are wholly separate finding of primary fact not depending on the say-so of the directors concerned. I cannot resist the impression that in 99 cases out of 100 the correct primary fact to find will be that which was in fact found in this case; namely, that in such a situation as the present the interests of all the companies were considered together. This is in accord with all the probabilities in the present and, indeed, most foreseeable cases.
The payment under the guarantee was therefore disallowed.
