‘Wholly and exclusively’ deductible?
To be deductible, an expense must be ‘wholly and exclusively’ for trade purposes. This sounds simple enough, but the definition of ‘wholly and exclusively’ has been the subject of endless dispute between businesses and professionals and HMRC.
If a cost can be found to have a ‘duality of purpose’, it will invariably mean that an expense is not allowed. The famous case of Mallalieu v Drummond concerned a barrister who failed in her claim to deduct the cost of her clothing as a business expense, although she could not appear in court without it. But the clothing also kept her warm and clad, so the expenditure was found to have a dual purpose. This reasoning also applies to other everyday expenses like food, medical costs (even to treat work-related conditions) and rent or mortgage payments, even if working from home saves on travelling time and allows the taxpayer to do more work.
Two recent cases concerning legal fees incurred by businesses show just what a grey area the definition of ‘wholly and exclusively’ can be. In Linsdale Post Office & General Store v HMRC, two brothers in partnership defended a claim by their sister that she should be an equal partner because she had allegedly contributed capital. The Tribunal’s decision was that the brothers’ legal fees were an allowable business expense because they were incurred while defending the business’s assets. This follows the general principle that money spent is deductible if it is with a view to preserving the existing business, its goodwill or assets. The payment simply maintains the existing position, without addition or improvement.
However, a few days later, the opposite conclusion was reached in the case of Purolite International Ltd v HMRC. The company’s owners – two brothers and a US company – faced large legal fees as a result of the US company supplying goods to Cuba in contravention of US law. Purolite contributed towards the US company’s costs, on the grounds that it risked losing its exports to the US if the case was lost. On appeal, the Tribunal held that Purolite’s involvement in the case had a ‘dual purpose’ – not only were the brothers safeguarding their export business, they were also defending themselves from criminal charges – and so the fees were not a deductible expense.
Did you know that most self-employed people whose income is below the VAT registration threshold will have the option of calculating profits on a simplified cash basis from April 2013 if Government proposals go ahead? Profits will be on a tax-year basis, and calculated as receipts less allowable business payments and simplified expenses. The cost of equipment will be allowed as an expense, so capital allowance computations will not be necessary, but no deduction will be given for loan interest. Motor expenses will be based on a standard mileage rate, and flat rate expenses allowed where the home is used for business purposes.