What is the wholly and exclusively rule?

When deciding if an expense is deductible or not for tax purposes it is important to consider if the expenditure was incurred wholly and exclusively for the purposes of your trade or employment. This is a difficult starting point as there is often a fine line dividing what meets the ‘wholly and exclusively’ rule and what does not.

In general, HMRC takes a slightly more relaxed view than a strict reading of the legislation would suggest. HMRC’s own internal manuals offers advice to HMRC inspectors to exercise care when applying the test.

The following example helps clarify this point. A self-employed consulting engineer may travel to exotic locations to advise on projects. The travel and the exotic locations may have some non-business benefits but where there was no principal private purpose, any personal benefits are said to be incidental to the carrying on of the profession and the cost is therefore allowable.

It is also possible to apportion part of an expense where necessary. For example, when considering the running costs of a car used partly for the purposes of the trade and partly for other purposes. HMRC’s position is that the costs associated with the business use of the car would be deductible.

Planning note:

There have been many decided cases on this subject and decisions on what is or is not incurred wholly and exclusively for the purposes of trade or employment is still very much a grey area. If you are considering expenditure where there is a possible element of private benefit, please call so we can offer an opinion, especially if the sum to be expended is a significant amount.

Posted in HMRC notices

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