BIM45031 - Specific deductions: entertainment: exceptions: normal course of trade for payment: judicial guidance

There must be a direct link between the expenditure incurred and payment received

The exception in ICTA88/S577 (10) applies where expenditure is incurred on the provision of anything which it is part of the ordinary course of the trade to provide for payment. The exception is aimed at the ordinary trading activities of businesses such as hotels that would otherwise fall foul of Section 577.

There must be a direct link between the expenditure incurred and the payment received. It is not sufficient for entertaining expenditure to be a ‘normal’ cost of the trade.

This was established in the case of Fleming v Associated Newspapers Ltd [1972] 48TC382. The company owned a number of newspapers and it was the normal practice of its journalists to purchase meals or drinks for ‘informants’ who would provide them with the necessary information to write the news articles which then appeared in the papers. It was argued on behalf of the company that the expense of these meals and drinks was part of the cost of producing the newspapers, which were subsequently sold for payment. The expenditure was therefore incurred in the ordinary course of trade for payment. (The later concept of ‘quid pro quo’ - see BIM45014 - was not considered in this case.)

The House of Lords found that what is now Section 577 (10) required the expenditure incurred to be directly linked to the goods or services for which payment was received. Although the hospitality provided was a necessary cost of producing the newspapers, the newspaper buyers were paying for papers and not for the refreshments given to the informants. As Lord Morris said (at page 408), ‘there is no trade or business of giving free hospitality’. It was also noted that, if the interpretation offered by Associated Newspapers had been correct, then much of the expenditure at which Section 577 was aimed would be allowed.

There was some argument as to the real purpose of Section 577 (10). In the Court of Appeal Salmon LJ said that it had been introduced for the purpose of removing any doubt as to whether traders in the hospitality business could claim a deduction for the cost of services provided. This interpretation was reinforced by Lord Simon in the House of Lords. He said (at page 411) that the legislation in Section 577 had been very widely drawn and it had been necessary to ensure that legitimate trade expenses were not disallowed. What is now subsection (10) had been added ‘to leave no room for argument that the ordinary trade expenses of the entertainment and catering industries are deductible in the same way as the ordinary trade expenses of other industries’.