s.34 Income Tax DEDUCTION – ‘wholly and exclusively for the purpose of
business’
Taxpayer’s expenditure has to be classified as of income or capital as this
determines whether or not tax deduction can be made. Per Usher’s v Bruce
business profits are calculated by deducting from receipts any deduction
general accounting practise would make, unless the deduction is specifically
prohibited by statute. The focus of this essay will not be on s.33 but s.34
Income Tax (Trading and Other Income) Act 2005 instead, which states that
no deduction is allowed unless trade expenditure was wholly and exclusively
for the purposes of the business.
‘For the purpose of business’
Lord Davey in Strong v Woodifield defines ‘for the purpose of business’
as for the purpose of earning profits. Here, the House of Lords (HOL) held the
damages paid to a customer negligently injured in the premise was not
deductible as it was out of business context and not for the purpose of making
profits.
Cave LC in British v Atherton further provides, expenditure aiming at
indirect achievement for profit is deductible, e.g. advertisement fees, as long
as the expenditure was for commercial expediency.
‘Wholly and exclusively’
The landmark case of Mallalieu v Drummond sets out the definition of
‘wholly and exclusively’ that can be summarised to (i) the expenditure’s sole
purpose must be the business, (ii) non-business side effect is irrelevant; and
(iii) the courts will attribute sub-conscious purposes, instead of just looking at
conscious ones. In short, the test of ‘for the purpose of business’ is not hard to
satisfy, but the element of ‘wholly and exclusively’ is complicated and likely to
lead to unjust outcome.
Apportionment
It was debatable as to whether a single item of expenditure could be
apportioned into two parts: deductible part which is wholly and exclusively for
the business and non-deductible part which is not for the business.
Subsequently, this apportionment was allowed by s.34(2) ITTOIA 2005.
However, the difficulties as to how and when apportionment could be made
are yet to be solved, especially when it concerns standing costs.
Criticisms on ‘wholly and exclusively’
business’
Taxpayer’s expenditure has to be classified as of income or capital as this
determines whether or not tax deduction can be made. Per Usher’s v Bruce
business profits are calculated by deducting from receipts any deduction
general accounting practise would make, unless the deduction is specifically
prohibited by statute. The focus of this essay will not be on s.33 but s.34
Income Tax (Trading and Other Income) Act 2005 instead, which states that
no deduction is allowed unless trade expenditure was wholly and exclusively
for the purposes of the business.
‘For the purpose of business’
Lord Davey in Strong v Woodifield defines ‘for the purpose of business’
as for the purpose of earning profits. Here, the House of Lords (HOL) held the
damages paid to a customer negligently injured in the premise was not
deductible as it was out of business context and not for the purpose of making
profits.
Cave LC in British v Atherton further provides, expenditure aiming at
indirect achievement for profit is deductible, e.g. advertisement fees, as long
as the expenditure was for commercial expediency.
‘Wholly and exclusively’
The landmark case of Mallalieu v Drummond sets out the definition of
‘wholly and exclusively’ that can be summarised to (i) the expenditure’s sole
purpose must be the business, (ii) non-business side effect is irrelevant; and
(iii) the courts will attribute sub-conscious purposes, instead of just looking at
conscious ones. In short, the test of ‘for the purpose of business’ is not hard to
satisfy, but the element of ‘wholly and exclusively’ is complicated and likely to
lead to unjust outcome.
Apportionment
It was debatable as to whether a single item of expenditure could be
apportioned into two parts: deductible part which is wholly and exclusively for
the business and non-deductible part which is not for the business.
Subsequently, this apportionment was allowed by s.34(2) ITTOIA 2005.
However, the difficulties as to how and when apportionment could be made
are yet to be solved, especially when it concerns standing costs.
Criticisms on ‘wholly and exclusively’
