An expense may of necessity provide a benefit to a third party.
For example, the supplier of goods to the trader is likely to
profit from the transaction.
Equally the trader in his or her own personal capacity may
benefit from the expenditure. For example, the trader in the course
of his or her business may meet interesting people or travel to
desirable destinations.
But an expense is not disallowed by ICTA88/S74 (1)(a) because
the trader (or third party) obtains an incidental or personal
benefit
provided that it was not part of the purpose in
incurring the expense to secure such benefit. The problem you will
face is how to distinguish:
The possibility that an ‘incidental benefit’ may
accrue means you cannot decide ‘wholly and exclusively’
issues by reference only to the effect(s) that follow from the
payment. You must establish all of the facts from which you may
infer the trader’s purpose (or purposes).
The issue is described in the case of Bentleys Stokes &
Lowless v Beeson [1952] 33TC491. The case concerned the cost of
lunches incurred by partners in a firm of solicitors in
entertaining existing clients and where business matters were
discussed. The case concerned the law as it applied prior to the
statutory disallowance, for expenditure on entertaining, in what is
now ICTA88/S577. The lunch appointments were so arranged as to
allow the discussion of any business in hand and the giving of any
legal advice required. Only the partner concerned and the client
(or their representative) was present on each occasion and the
legal advice was charged in the normal way.
The Commissioners found that the entertainment involved an
element of hospitality and concluded that the expenditure was not
allowable. The courts decided that the finding that the lunches
involved the provision of hospitality did not conclude the matter.
There was no evidence in the stated case to suggest that this was
private or social hospitality and not business hospitality. The
question was thus - is the cost of the lunches money expended
wholly and exclusively for the purposes of the trade?
In the Court of Appeal, Romer LJ explained why the
expenditure was allowable. Romer LJ said that in the phrase ‘
wholly and exclusively’ the word
‘
wholly’ referred to the quantum
of money; the word ‘exclusively’ referred to the
purpose - the purpose must be the
sole purpose. There was no dispute as to the
amount of money involved. The issue was whether the
taxpayer’s exclusive purpose was for their profession. Romer
LJ observed that entertaining inevitably involves an element of
hospitality but that does not mean that it is automatically
disallowable (remember the case preceded what is now ICTA88/S577).
Various other matters that have come before the courts also
involve a degree of benefaction and have resulted in an allowance
on their own particular facts, for example:
As mentioned above, Bentleys Stokes & Lowless v Beeson
[1952] 33TC491 was heard before what is now ICTA88/S577 was enacted
to disallow the costs of entertaining - see
BIM45000 onwards. The case is
nevertheless important because Romer J’s explanation applies
to other expenditure not only that specifically incurred on
entertaining. The question to address is not whether the
expenditure results in a personal benefit accruing to the trader
but whether it is incurred solely for the purposes of the trade.
This is very much a question of fact.
For those who do not have ready access to tax case volumes,
the part of Romer J’s judgement on which the above guidance
is based is set out below, 33TC at the foot of page 503 and the
head of page 504:
It is conceded that the first adverb
-’wholly’ - is in reference to the quantum of the money
expended and has no relevance to the present case. The sole
question is whether the expenditure in question was
‘exclusively’ laid out for business purposes, that is:
What was the motive or object in the mind of the two individuals
responsible for the activities in question? It is well established
that the question is one of fact: and again, therefore, the problem
seems simple enough. The difficulty however arises, as we think,
from the nature of the activity in question. Entertaining involves
inevitably the characteristic of hospitality. Giving to charity or
subscribing to a staff pension fund involves inevitably the object
of benefaction. An undertaking to guarantee to a limited amount a
national exhibition involves inevitably supporting that exhibition
and the purposes for which it has been organised. But the question
in all such cases is: was the entertaining, the charitable
subscription, the guarantee, undertaken solely for the purposes of
business, that is, solely with the object of promoting the business
or its profit earning capacity?
It is, as we have said, a question of fact.
And it is quite clear that the purpose must be the sole purpose.
The paragraph says so in clear terms. If the activity be undertaken
with the object both of promoting business and also with some other
purpose, for example, with the object of indulging an independent
wish of entertaining a friend or stranger or of supporting a
charitable or benevolent object, then the paragraph is not
satisfied though in the mind of the actor the business motive may
predominate. For the statute so prescribes. Per contra, if in truth
the sole object is business promotion, the expenditure is not
disqualified because the nature of the activity necessarily
involves some other result, or the attainment or furtherance of
some other objective, since the latter result or objective is
necessarily inherent in the act.
