BIM37925 - Wholly & exclusively: expenditure having an intrinsic duality of purpose: food and drink consumed at solicitors' annual conference and other matters
Food and drink consumed during partnership meetings is not allowable
Food and drink consumed during partnership meetings is not
allowable. But the costs of overnight accommodation incurred to
allow discussion of ordinary business matters is allowable
notwithstanding that the charge was inclusive (that is to say,
included food and drink).
In the case of Watkis v Ashford Sparkes & Harward [1985]
58TC468, a firm of solicitors practising in Devon, with 19 partners
and offices at Exeter, Tiverton, Crediton and Cullompton claimed a
deduction for:
- £804 expenditure incurred in the provision of food and drink consumed by the partners in the course of weekly or fortnightly local lunchtime meetings held in the Exeter and Tiverton offices between the hours of 1 and 2 pm. Topics dealt with at these meetings were entirely business matters. The lunch-hour was chosen to avoid interfering with commitments to clients and to maximise the chances of the partners concerned being able to attend.
- £451 for the provision of food and drink consumed at six evening meetings of all the partners. Three of which were held in a private room at a hotel in Exeter, three in the library at the Tiverton offices and afterwards over a meal at a restaurant in that town. The topics that were considered at these evening meetings were important matters affecting the firm generally. They started at 6 pm and continued over the meal, which was taken at about 8 pm. Although the second part of these meetings was less formal than the first, the conversation over the meal was all about the affairs of the firm.
- £938 on the provision of accommodation, food and drink for the partners on the occasion of the firm’s annual conference., which took place at a hotel in Salcombe on Saturday and Sunday, 24 and 25 November 1979. Annual conferences have been held since about 1973. The matters discussed in 1979 were four particularly important topics which were chosen because of their importance over and above matters normally discussed at the regular evening meetings. There were two formal sessions, one of about 2 hours on Saturday afternoon and one of about 2 hours on Sunday morning. However, business discussion was not limited to those formal meetings, the object of the exercise being that the partners should be able to continue the discussion of these particularly important topics informally for the rest of the weekend. The continuity of these discussions was of considerable importance and value.
The conference was attended not only by twenty partners and one consultant to the firm, but also by eighteen partners’ wives and twenty of their children. The wives were invited for two reasons: first, because it was desired that all partners should attend, and some of the married partners might have been less likely to attend if they had had to leave their wives behind; and, secondly, because it was thought desirable that at least once a year the wives should have the opportunity to be present with their husbands and the other partners and their wives to discuss problems affecting the running of the firm. Children came too because in many cases the younger wives could not go away for a weekend without taking their children with them.
- £130 being the firm’s contribution to expenditure incurred by their own and three other firms of West Country solicitors in providing a room and food and drink for partners of all four firms in connection with a meeting called to discuss matters of common professional concern. This occasion is known as the Kitopenel conference, which in 1979 was attended by ten partners from the taxpayers’ firm. The conference was held at a hotel in Moretonhampstead and lasted from 4 pm until about 11 pm. The purpose was to devote the whole period to discussion of topics of mutual professional interest, first at a formal meeting and afterwards at dinner. The conversation over dinner was all about business matters.
The Special Commissioner allowed the expenditure in full,
£2,323.
In the High Court Nourse J disallowed the whole of the
expenditure under headings 1 and 2, some £1,255, and the food
and drink element in 4. This followed from the finding that the
meals were provided at times when the partners would normally have
eaten lunch or dinner and followed the decision in Mallalieu v
Drummond [1983] 57TC330 (see
BIM37910).
Nourse J allowed the expenditure under heading 3 because
applying Edwards v Warmsley Henshal [1967] 44TC431 (see
BIM37615) he could not distinguish
between the cost of accommodation and food and drink; they not
having been billed separately.
Nourse J considers the, at the time recent, decision in
Mallalieu v Drummond (see BIM37910). The decision was authority for
the proposition that the conscious motive of the taxpayer in
incurring the expenditure, although of vital significance, is not
inevitably the only object which can be found to exist.
Nourse J explains that just because the participators enjoyed
the events that they attended it does not follow that the costs are
to be disallowed. In Nourse J’s view that consideration was
largely if not wholly irrelevant. Many people enjoy their work.
Many people do not enjoy social occasions, particularly when they
are in some way connected with work. But many occasions which are
social in form, whether they are enjoyed or not, are very
successful in furthering business interests.
Nourse J explains why expenditure under headings 1, 2 and 4
is not allowable. The real question was whether the Commissioner
was entitled to find that the business purpose in incurring the
expenditure was not just the predominant purpose but in truth the
exclusive purpose, so that any private benefit to the taxpayers was
purely incidental. The food and drink at the lunch-time and evening
meetings and at the Kitopenel conference was provided at times when
the partners would normally have eaten lunch or dinner anyway.
There was no evidence and no finding that if the meetings had not
been held they would not have lunched or dined elsewhere, and
Nourse J did not think that he could make any inference to that
effect. The lunches and dinners took the place of meals that would
have been consumed in any event, and even if that was not so the
result would be the same. Just as Miss Mallalieu needed to wear
clothes not only when she was in court but also when she was not,
so did the taxpayers need food and drink irrespective of whether
they were engaged on a business activity or not. The requirement to
eat arose out of a human need and not for the purposes of the
taxpayers’ profession.
Finally, Nourse J explained why the partners’ costs at
the annual conference are allowable; not to satisfy a need for
accommodation but to allow discussion to continue. The cost of the
food, drink and accommodation at the annual conference was
different. The cost of the accommodation was not expenditure which
met the needs of the taxpayers as human beings. They did not need
it for that purpose because they all had their own homes where they
could have spent the night. The reason why they needed it was so
that they could continue their discussion informally between the
formal sessions on the Saturday afternoon and the Sunday morning.
The Commissioner was entitled, on the facts found, to conclude that
the business purpose in incurring the cost of the accommodation was
the exclusive purpose and that the private benefit to the taxpayers
was purely incidental. This conclusion was not one with which
Nourse J could interfere - Edwards v Bairstow & Harrison [1955]
36TC207, see
BIM37045.
Nourse J dismissed the Crown’s alternative arguments
under what is now ICTA88/S74 (1)(b), that the expenditure was
incurred on the maintenance of the parties, on the basis that this
factually incorrect. The disputed expenditure was intended to
secure continuity of discussion. You can see the importance of
establishing the true purpose of disputed expenditure.
You should remember that of the claimed expenditure of
£2,323 only some £1,255 was allowed. All of the
expenditure on food and drink for the regular meetings was
disallowed as was the food and drink at the meeting with fellow
professionals.
For those who do not have ready access to tax case volumes,
the part of Nourse J’s judgement where he considers the
Mallalieu case is set out below, 58TC488J to 489D:
There has been some discussion as to the
effect of the decision of the House of Lords in Mallalieu v
Drummond [57TC330 - see
BIM37910].
Mr. Bates, for the taxpayers, has pointed out
that Miss Mallalieu was seeking to upset the decision of the
General Commissioners and that she could only do that if she could
bring the case within the principle of Edwards v Bairstow
[36TC207 - see
BIM37045].
He says that their Lordship’s only
concern was to consider whether the Commissioners were entitled to
find that she had a dual purpose. That is strictly speaking
correct, although it is certainly significant that Lord Brightman
said that he himself would have found it impossible to reach any
other conclusion. Furthermore, Mr. Bates accepts that the decision
is at the least authority for the proposition that the conscious
motive of the taxpayer in incurring the expenditure, although of
vital significance, is not inevitably the only object which can be
found to exist.
Mr. Carnwath, for the Crown, goes further and
submits that the decision [in Mallalieu v Drummond (see
BIM37910)]
establishes that in the ordinary case of
expenditure which meets the needs of the taxpayer as a human being,
such as the cost of the food that you eat and the clothes that you
wear, it is not open to the Commissioners to treat the meeting of
those needs merely as an incidental effect of a business object or
purpose; it must be treated as a separate purpose in itself, albeit
that it may be a subsidiary one. Although it is unnecessary for me
to decide whether their Lordships intended to establish a general
rule to the effect for which Mr. Carnwath contends, it seems to me
that the practical consequences of so clear and authoritative a
decision are almost certain to be the same.
For those who do not have ready access to tax case volumes, the part of Nourse J’s judgement where he says that just because the participators enjoyed the events that they attended it does not follow that the costs are to be disallowed is set out below, 58TC489E to 489G:
…I must start by saying that the question whether the purpose of an expenditure is or is not a business purpose does not depend on whether it was incurred on the occasion of an activity which the taxpayers and others found enjoyable. I mention that point because the argument of the Crown before the Commissioner in regard to the annual conference, and perhaps the evening meetings and the Kitopenel Conference as well, appears to have proceeded partly on the footing that these occasions were enjoyed by those who attended them and that that was a ground for saying that their purpose could not have been a business purpose. In my view that consideration is largely if not wholly irrelevant. Many people enjoy their work. Many people do not enjoy social occasions, particularly when they are in some way connected with work. But many occasions which are social in form, whether they are enjoyed or not, are very successful in furthering business interests.
For those who do not have ready access to tax case volumes, the part of Nourse J’s judgement where he explains why much of the expenditure is not allowable is set out below, 58TC489I to 490D:
The real question is whether the Commissioner
was entitled to find that the business purpose in incurring the
expenditure was not just the predominant purpose but in truth the
exclusive purpose, so that any private benefit to the taxpayers was
purely incidental. I will here deal with the expenditure under
three heads: first, the cost of the food and drink at the
lunch-hour and evening meetings, and also at the Kitopenel
Conference; secondly; the cost of the food, drink and accommodation
at the annual conference; and, thirdly, the cost of providing a
room at the Kitopenel Conference.
The food and drink at the lunch-time and
evening meetings and at the Kitopenel Conference was provided at
times when the partners would normally have eaten lunch or dinner
anyway. There was no evidence and no finding that if the meetings
had not been held they would not have lunched or dined elsewhere,
and I do not think that I can make any inference to that effect. It
seems to me that I ought to conclude that the lunches and dinners
took the place of meals which would have been consumed in any
event, but even if that is not so I think that the result is the
same. Just as Miss Mallalieu needed to wear clothes not only when
she was in court but also when she was not, so did the taxpayers
need food and drink irrespective of whether they were engaged on a
business activity or not. It was suggested that you cannot live
without clothes but that you can live without food and drink, at
least for a time. I do not find that at all a persuasive
distinction. It does not matter whether the need has to be
satisfied on a continuing basis or only at intervals. Sooner or
later food and drink must be consumed, and when that happens the
need is satisfied.
For those who do not have ready access to tax case volumes, the part of Nourse J’s judgement where he explains why the partners’ costs at the annual conference are allowable is set out below, 58TC490G to 491D:
The cost of the food, drink and accommodation
at the annual conference stands on a different footing. I do not
think that the cost of the accommodation can necessarily be said to
have been expenditure which met the needs of the taxpayers as human
beings. They did not need it for that purpose because they all had
their own homes where they could have spent the night. The reason
why they needed it was so that they could continue their discussion
of the particularly important topics informally between the formal
sessions on the Saturday afternoon and the Sunday morning. If they
had had to break up and go home after dinner on the Saturday
evening and come back on the Sunday morning, that continuity, which
was of considerable importance and value, would have been broken or
at least seriously damaged. In the circumstances, it seems to me
that the Commissioner was entitled, on the facts found, to conclude
that the business purpose in incurring the cost of the
accommodation was the exclusive purpose and that the private
benefit to the taxpayers was purely incidental. His conclusion is
not one with which I can interfere.
The same considerations do not necessarily
apply to the cost of the food and drink. The well-established
general practice of the Inland Revenue in the case of what are
known as ‘travelling occupations’ is not to distinguish
between the cost of travel and accommodation on the one hand and
food and drink on the other. In other words, hotel bills, if
reasonable in amount, are usually allowed in full. I have no reason
to think that that practice does not correctly represent the law.
However, Mr. Carnwath has suggested, although I think rather
faintly, that since the profession of a solicitor is not usually
regarded as a travelling occupation, the position is different in
the present case. It seems to me that that suggestion cannot stand
with the decision of Cross J. in Edwards v Warmsley, Henshall &
Co [44TC431, see
BIM37615].
In my view no distinction is to be made
between the cost of the overnight accommodation on the one hand and
the food and drink on the other.
There is one further point on the annual
conference. It was at one stage suggested by Mr. Carnwath that
there was an illogicality in the taxpayers only claiming to deduct
that part of the cost which was attributable to themselves. That
suggestion, and any consequences which might have been said to flow
from it, were not pressed, and I propose to say nothing more about
them.
That leaves the cost of providing the room at
the Kitopenel Conference. It seems clear to me - and the contrary
was not suggested - that if the cost of the room can be separated
from the cost of the food and drink, the former is deductible as
having been incurred wholly and exclusively for a business
purpose.
