BIM37020 - Wholly & exclusively: statutory background: legislative starting point
No deductions except those expressly enumerated in the Taxes Acts
ICTA88/S817 (1) limits the deductions that can be made in
arriving at the profits for tax purposes to those specifically
allowed by the Taxes Acts.
If you need it, the precise wording of the legislation
is:
In arriving at the amount of profits or gains for tax purposes-
no deductions shall be made than such as are expressly enumerated in the Tax Acts;…
There are few provisions that provide for specific deductions;
ICTA88/S77 is one, allowing a measure of relief for the incidental
costs of raising certain loan finance. But deductions are not
limited to those permitted by statute. This is because the
legislation charges tax on the profits of a trade, profession or
vocation (for IT, ICTA88/S60; for CT, ICTA88/S70). Profits are not
synonymous with income and are calculated after the deduction of
expenses. So you should recognise at the outset that profits is not
the same thing as income.
As explained at
BIM35101, there is no statutory
definition of profits for Schedule D purposes. From the earliest
days courts have relied upon accountancy to determine the starting
point of the tax computation. The general scheme is that profits
are ascertained by accounts drawn up in accordance with the
precepts of proper commercial accountancy; the figure of profits
from such accounts is then subject to any applicable statutory or
case law adjustments.
Below are a two of the early cases where the point was
considered. You should recognise that in earlier tax cases
accountancy was in a less developed state than now.
In British Insulated and Helsby Cables, Ltd. v Atherton
[1925] 10TC155 (see
BIM35010), Lord Cave observes that it
has often been pointed out that the Act does not contain any
express allowance or enumeration of deductions, and therefore it is
necessary first to enquire whether the deduction is expressly
prohibited and if not whether it is of such a nature as to be
proper to be charged against incomings in a computation of the
balance of profits and gains. He goes on to state, 10TC at page
191, that:
…a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade…
Lord Porter in Smith’s Potato Estates v Bolland (see BIM37850) comments on this remark, 30TC at the foot of page 289:
…this statement was obiter only, as the actual decision was merely that the expenditure was capital expenditure and, therefore, not deductible, but the language does require careful consideration. In that case the question actually in issue was whether subscriptions by a company towards a pension fund were to be deducted in ascertaining the balance of profits and gains of its trade, and it is true that the expenditure did not at once affect its revenue, but it was a method of ensuring the better and more contented service of its employees and in that sense it did directly affect the success of its enterprise. It was exclusively laid out to enable the company to be more successful; no part of it was incurred in order to ascertain the Revenue's proportion of the profits when made.
