BIM37800 - Wholly & exclusively: expense of earning or application of profits?
Introduction and layout of guidance
On occasion you will need to determine if expenditure represents
an expense of earning profits as opposed to an application of
profits or a distribution out of profits.
As a general proposition what a trader does with the profits
once they have been earned has no bearing on the calculation of the
profits for tax purposes. This follows both from the normal rules
of commercial accountancy and also from the wording of ICTA88/S74
(1)(a). There is a clear distinction between:
- expenses incurred in earning profits, and
- expenses paid out of profits.
Which side of the line a particular expense falls is a question
of fact and you will need to establish all of the relevant
circumstances to decide marginal cases.
The courts have considered this general issue in a number of
cases and the guidance that follows discusses some of these in
detail.
| BIM37810 | Defalcations by controlling director (Curtis v J & G Oldfield Ltd) |
| BIM37820 | Rent subject to abatement of profits (Union Cold Storage Co Ltd v Adamson) |
| BIM37830 | Technical assistance in return for a share of profits (British Sugar Manufacturers Ltd v Harris) |
| BIM37840 | Legal costs in connection with an appeal (Allen v Farquharson Bros & Co) |
| BIM37850 | accountancy fees in connection with an appeal (Smith’s Potato Estates Ltd v Bolland) |
| BIM37860 | ‘Compensation for loss of office’ on share sale (Overy v Ashford Dunn & Co Ltd) |
