To determine whether a particular expense was incurred wholly
and exclusively for the purposes of the trade it is essential that
you fully establish the nature and extent of the taxpayer’s
trade.
In the case of Reid’s Brewery Co Ltd v Male [1891]
3TC279, the company carried on the trade of brewers and also owned
tied houses which were let to tenants. The brewer made loans to the
tenants and to other customers. The loans were usually of a
temporary nature and were made on various classes of security.
The Commissioners took the view that the loans were made for
the purpose of extending the brewer’s trade and were of a
‘capital’ nature. The Commissioners also took the view
that the brewer had no trade other than that of brewing.
Pollack J was satisfied that the evidence before the
Commissioners established that:
The loans or advances were not capital and were found to be made
wholly and exclusively for the purposes of the trade. The deduction
was therefore allowable.
For those who do not have ready access to tax case volumes,
the part of Pollock J’s judgement on which the above guidance
is based is set out below, 3TC at the foot of page 284 and the head
of page 285:
I do not think anybody who reads this case and is at all acquainted with the custom of brewers in large towns can suppose that this particular firm or company carry on business as money lenders only; but what they really do is to carry it on as an adjunct, ancillary to and a very advantageous adjunct to their business as brewers. That being so, I think the real question which is arguable in this case is, whether the money so, I should not say laid by, but so used or expended, is to be treated as capital account? Of course, if it be capital invested, then it comes within the express provision of the Income Tax Act, that no deduction is to be made on that account. That is provided for most clearly by the statute, but I think myself it would be a fallacy to call this money which is so dealt with by the Appellants, capital invested. In the first place, it is found upon the facts, in no case is any loan or advance made by them a permanent investment, whether it be by way of deposit of deeds, mortgages, promissory notes, or otherwise. That of itself might not be sufficient, but when you come to read what is the course of dealing, no person who is acquainted with the habits of business can doubt that this is not capital invested. What it is is this. It is capital used by the Appellants, but used only in the sense that all money which is laid out by persons who are traders, whether it be in the purchase of goods be they traders alone, whether it be in the purchase of raw material be they manufacturers, or in the case of money lenders, be they pawnbrokers or money lenders, whether it be money lent in the course of their trade, it is used and it comes out of capital, but it is not an investment in the ordinary sense of the word.
For those who do not have ready access to tax case volumes, the part of Charles J’s judgement on which the above guidance is based is set out below, middle and the end of page 287 of 3TC:
I think the legitimate conclusion from those statements is this, that the Appellants carry on the brewing business with this business of money lending as a branch or adjunct to it.
Then, it being one business and not two, are they entitled to the exemption of this sum of £16,000 which they claim? I think that they are…I think that, upon the findings of this case, this money was money laid out and expended exclusively for the purpose of the brewing trade carried on by the Appellants; and, that being so, it is a legitimate subject of deduction in arriving at the balance of the profits and gains…
