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Wholly and exclusively business expenses - Tips and traps

By Sarah Bradford, December 2020

In this sample excerpt from the newly updated guide ‘How to Maximise Deductions for Business Expenses’, Sarah Bradford looks at how the wholly and exclusively rule works for businesses. Get 40% off today.

The Basic Rule  

The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade. The rule works by prohibiting expenses that are not wholly and exclusively so incurred, stating: 

‘In calculating the profits of a trade, no deduction is allowed for – 

  1. expenses not incurred wholly and exclusively for the purposes of the trade…’. 

Unlike the equivalent rule for employment expenses, there is no requirement that the expense is ‘necessarily’ incurred. This means that as long as an expense is incurred for the purposes of the business and only for that purpose, a deduction is given. There is no requirement that it is necessary to incur the expense for it to be deductible.  

No Deduction For Private Expenditure 

To qualify for a deduction from trading profits, the ‘trade purpose’ must be the sole purpose of the expenses. Private expenditure is not incurred ‘for the purposes of the trade’, and as such it fails the deductibility test. No deduction is given for private expenditure and under no circumstances should private items be `put through the business’. When preparing the accounts, it is prudent to check for any private items that might have slipped through by mistake so these can be treated correctly. 

It is important to appreciate that the existence of a non-trade or private purpose will preclude the deduction in full if there is no objective test by which the trade element can be distinguished from the non-trade element. By contrast, if it is possible to identify the trade and non-trade elements separately, a deduction may be permitted for the trade portion.  

Example – Non-deductibility Of Personal Expenses 

Hattie is a sole trader. She meets her friend Helena for lunch and pays for the lunch with her business debit card. The expense is a private expense, not a business expense, and cannot be deducted in working out the taxable profits of the business. 

It is not always easy to keep business and private expenditure separate, particularly if the business is small and run from home, and it can be very easy when, say, picking up some pens and paper for the office to buy a magazine and some chocolate at the same time, and to pay for it together and to claim a deduction for the whole lot. This should not be done and may attract unwanted attention from HMRC.  

It is also important to keep business and private expenditure separate so that business expenses are not met from a personal account and overlooked. In the above example, it would be equally easy to buy some stationery for the business at the same time as buying a newspaper and a book, pay with it from a personal account and fail to claim a deduction for the business items. Good record keeping and separate accounts are essential to help avoid errors. 

Practical Tip 

It is good practice to keep private and business expenditure separate and to have a separate bank account for business expenses.  

Mixed Use Expenses And Apportionment 

Sometimes expenses will be incurred for both business and private purposes. The fact that a deduction is not permitted for private expenditure does not preclude a deduction for the business portion, as long as it is possible to identify the different elements. 

The legislation provides that: 

‘If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part, or identifiable portion of the expense which is incurred wholly and exclusively for the purposes of the trade’. 

The key as to whether any deduction can be claimed where an expense is incurred for both private and business purposes is whether it is possible to identify the trade portion. 

Where an expense has a business and private element, the expense should be apportioned, and a deduction claimed for the business portion. The apportionment should be done on a just and reasonable basis.  

A common example of this may arise if a mobile telephone is used for both business and personal calls. From the bill, it will be possible to identify the private calls and the business calls, and the cost of each. 

Example – Apportionment Of Mixed-Use Expenditure 

John has a mobile phone that he uses for home and work. He works out that 65% of his calls are business calls. In a year, his bills total £750. He can claim a deduction for £468 (65% of £750). 

Another common scenario where an apportionment might be required is in relation to a car which is used for both business and personal purposes. In this case, HMRC confirms (in their Business Income Manual at BIM37600) that a deduction will be allowed for the actual cost of any journey undertaken for the purposes of the trade (including fuel, tolls, parking fees, etc.), and also for a proportion of the cost of the road tax, insurance (as long as it covers business use), repairs, finance costs, etc. 

Practical Tip 

To save work in recording actual expenditure and performing an apportionment calculation, consider the use of simplified expenses, where appropriate . 

The issue of apportionment was considered in the case of Wildbore v Luker [1951] 33 TC 46. The case involved a claim to deduct all of the increase in rates for a public house, in respect of which part was used for the purposes of the trade and part for private living accommodation. The court rejected the claim for the full deduction, accepting instead the then Revenue’s approach of apportioning the expenditure and allowing a deduction in relation to that part which was used for the purposes of the trade. 


If it is not possible to apportion the expenditure between trade and non-trade use, no deduction is permitted. 

Duality Of Purpose 

There is a significant difference between expenses in respect of which an identifiable portion relates solely to the purposes of the trade and expenditure which is incurred for a dual purpose, and consequently is not allowable. 

To meet the deductibility test, the expense must be incurred ‘wholly and exclusively for the purposes of the trade’. Where there is duality of purpose, this test is not met, and consequently none of the expenditure is deductible; there is no apportionment here.  

The courts have considered the issue of duality of purpose in respect of a range of business expenses. One of the leading cases is that of Mallalieu v Drummond [1983] 57 TC 330 which concerned whether a barrister was allowed to claim a deduction for expenditure on replacing and laundering professional clothing. In accordance with Bar requirements, the barrister acquired and wore particular items to court. Although the items in question were in the nature of everyday clothing, the barrister only wore the clothes to work, preferring more colourful clothes away from work. The barrister bought the work clothes solely because she would not have been allowed to appear in court had she not dressed in that way, as was required by the Bar. 

Although she kept the clothes solely for work, the judge denied the deduction on the basis of duality of purpose. Despite the fact that the particular clothes were chosen in order to meet the requirements of the Bar and to allow the barrister to appear in court, the clothes were also purchased to keep the barrister ‘warm and clad’ whilst pursuing her career, as well as helping her to earn profits in that career. The case reached the House of Lords (the taxpayer having won in the High Court and the Court of Appeal). At the time that the expenditure was incurred, the purpose of the expenditure was to serve two purposes – one business and one private. The duality of purpose meant the expenditure could not be deductible. It did not matter that the business purpose was the primary purpose. 

There are numerous other examples where a claim for deductibility may fail as a result of duality of purpose. For example, if a trader needs reading glasses to read work emails and to do his accounts and other paperwork, he will also need them to read his Sunday newspaper at the end of the week. Consequently, the cost of the glasses cannot be deducted as a business expense; there is a duality of purpose.  

For examples of duality of purpose in relation to travel expenses.  

Practical Tip 

Review dual purpose expenditure to check that it is not possible to apportion it between business and non-business use. 

Incidental Benefit 

There is a difference between expenditure having a dual purpose and there being an incidental benefit to incurring the expenditure. 

For example, if a sole trader is required to travel to Italy to meet with a client, and in doing so is able to enjoy lovely weather and scenery, as long as the trip is solely a business trip, the fact the trader is able to enjoy the weather and scenery while he is there is an incidental benefit which does not compromise the deduction. The expenditure on travelling to Italy was incurred for the sole purpose of meeting with the client.  

By contrast, if the trader combined the visit to the client with a holiday with his wife, the cost of travelling to Italy would have dual purpose (private and trade), prohibiting a deduction. However, in this case, it may be possible to identify different elements of the trip relating to business and personal travel and claim a deduction for the business costs.  

HMRC’s Private And Personal Expenditure Toolkit 

HMRC produces various toolkits, which focus on common errors they come across. The aim of the toolkits, which are aimed at tax agents, is to highlight the errors so that steps can be taken to avoid them. The toolkits are updated each year. 

HMRC’s personal and private expenditure toolkit highlights the errors that HMRC commonly find in relation to private and personal expenditure. The toolkit covers revenue expenditure only.  

Personal bills are an area of risk, particularly where the personal and business finances are closely linked. The toolkit states: 

‘In many businesses the proprietor’s or partners’ finances and those of the business are closely linked. This can result in personal expenses being paid by the business and/or business expenses paid by the proprietors or partners. To ensure that all relevant business expenditure is properly charged in the accounts, it is important to review the expenses claimed and consider whether all deductions are wholly and exclusively for the purpose of the business. There are circumstances where the expenses are not for the sole purpose of the business, for example, when the proprietor uses their home for business. Generally, these expenses should be apportioned and only the business element allowed as a deduction in the accounts or computation.’ 

The toolkit flags the option of using simplified expenses rather than calculating deductions for certain expenses by reference to actual costs. 

Other areas of particular risk include: 

  • travel and subsistence; 
  • entertaining, gifts, subscriptions and sponsorship; and 
  • drawings and the capital account. 

The toolkit contains a checklist, which highlights potential areas of risk and how that risk can be mitigated. Completing the checklist is a useful exercise; not only may it identify items which have been deducted where no deduction is permitted, it may also bring to light deductible expenses which have been overlooked. The checklist contains the following: 

  • Have expense headings which could include private or personal expenditure been reviewed to identify any non-business elements? 
  • Have any personal expenses been paid by credit card allocated to drawings? 
  • Have all business expenses paid by credit card been analysed correctly? 
  • If there has been interest or late payment fees charged on credit cards, have these been restricted appropriately? 
  • Has any interest paid on a loan, hire purchase or other finance for a mixed purpose been restricted appropriately? 
  • Have any household bills paid by the business been analysed and allocated appropriately? 
  • If the proprietor or partner used part of their home for business purposes, has the business element been properly identified? 
  • Have the profits been adjusted for the cost of any personal clothing paid through the business? 
  • If a business vehicle has been used for non-business travel, including home to work, has only the business travel been claimed? 
  • If a private vehicle has been used for business and non-business travel, have only the appropriate costs been claimed?  
  • Are all expenses claimed for business trips wholly and exclusively for business purposes? 
  • If a family member accompanied the proprietor or partner on a business trip, have any associated non-business costs been disallowed? 
  • Have all business expenses paid by credit card been correctly analysed? 
  • Have profits been adjusted appropriately for any entertaining expenses paid? 
  • Have profits been adjusted appropriately for gifts made? 
  • Have all gifts, donations or subscriptions to charity been reviewed? 
  • Have any sponsorship payments made, particularly to connected parties, been reviewed? 
  • If the sponsorship includes hospitality or other benefits, have these been dealt with appropriately? 
  • If the proprietor’s or partners’ drawings have been described as wages or salaries, have these been properly allocated to drawings 
  • If there have been wages or salaries pay to relatives or connected parties, are the amounts paid commensurate with their duties? 
  • If the capital or current account is overdrawn and the loan is funding the proprietor’s or partners’ drawings, has the interest been restricted appropriately? 
  • Have the drawings been adjusted for any trading stock taken for personal use? 
  • Has an appropriate adjustment been made for services provided to the proprietor or partner by the business? 
  • Are all of the payments made to a registered pension scheme allowable? 
  • Have the profits been adjusted for any professional fees paid by the business for personal tax matters? 

The toolkit is available on the website. It is updated each year. 

In this sample excerpt from the newly updated guide ‘How to Maximise Deductions for Business Expenses’, Sarah Bradford looks at how the wholly and exclusively rule works for businesses. Get 40% off today.

The Basic Rule  

The basic rule is that a deduction is allowed for expenses incurred wholly and exclusively for the purpose of the trade. The rule works by prohibiting expenses that are not wholly and exclusively so incurred, stating: 

‘In calculating the profits of a trade, no deduction is allowed for –;

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