As most of you are aware there are a number of expenditure items that are dealt with in your accounts that have both a business and private element. The biggest example would be motor expenses, where all of the expense is shown in the accounts and then an adjustment is made when calculating the tax to take into account the amount of private use that has been incurred.
A recent case involving Tim Healy, a well known actor who has appeared in ‘Auf Wiedersehen, Pet’, ‘Benidorm’ and ‘Waterloo Road’, shows that HMRC are getting much tighter on this type of thing (RCC v Healy).
The wholly and exclusively test
The upper tribunal agreed with HMRC, and in outlining their decision presented a useful summary of of the principles of the wholly and exclusively test.
The following principles can be derived from this analysis of the authorities:
- The “exclusively” limb of the “wholly and exclusively test” entails examining whether the expenditure in question has a dual purpose. If the expenditure is not solely for a business purpose it will not be deductible (Bentleys, Stokes & Lowless, Mallalieu v Drummond)
- Expenditure on items that outside a business context simply meet ordinary needs can be regarded as having solely a business purpose such as food and drink in the context of business lunches (Bentleys, Stokes & Lowless), hotel accommodation in the context of business trips or conferences (Elwood v Utitz), accommodation for an itinerant trader (Sean Reed)
- Consequently, there is a distinction between effects which are aimed at (the purpose of the expenditure) and those which are incidental to that aim; the latter do not necessary colour the former, even if they are inevitable (Elwood v Utitzand the third passage from Mallalieu v Drummond cited in paragraph 50 above)
- Expenditure will not be deductible unless there is a clear connection between the expenditure incurred and the trade or profession in question (Caillebotte v Quinn, MacKinley v Arthur Young, McClelland Moores), and a distinction must be drawn between living expenses and business expenses (Newsom v Robertson)
- The fact that an item of expenditure may be necessary for an individual to conduct his trade does not mean that it passes the “wholly and exclusively” test (Newsom v Robertson)”