4. Trading Income - DE

Question 1

What is a DE?

Answer 1

1) Income, not capital, expense (s.33)
2) incurred wholly and exclusively for purpose of trade (s.34)
3) facilitate earning of profit (strong v woodifield)

Question 2

Morgan v Tate & Lyle

Answer 2

FOR PURPOSE OF TRADE (S.34(1))

• sugar refining company incurred expense in propaganda campaign to oppose threatened nationalism
• expense was to preserve assets of company from seizure and therefore enable them to carry on and earn profits
• couldn’t assume trade would continue after nationalism

Question 3

Healy v R & C Comrs

Answer 3

• flat one mile from theatre he was working in

- not WHOLLY AND EXCLUSIVELY because he had a 3 bedroom flat which he had guests stay over in

Question 4

Mallalieu v Drummond

Answer 4

female barrister trying to deduct cost of clothes for wearing in court

• look at conscious or subconscious PURPOSE (if that is for trade = deductible)
• INCIDENTAL BENEFITS DON’T MATTER
• they said her subconscious purpose wasn’t trade but to look decent

Question 5

Watkis v Ashford Sparkes and Harvard

Answer 5

FOOD/DRINK AT MEETINGS - not DE, it satisfied human needs of solicitors and took place of meals they would otherwise have consumed

ACCOMODATION, food and drink for partners at hotel at ANNUAL CONFERENCE - was DE, private benefit was purely incidental, accommodation was to allow business discussions the next morning

Question 6

Vodafone Cellular Ltd v Shaw

Answer 6

payment to terminate contract which required V to make annual payment for technical support
- benefited all 3 companies

• DE BECAUSE PURPOSE WAS TO RELIEVE V OF TRADING LIABILITY of V ALONE
• so wholly and exclusively
• didn’t matter that V’s directors considered all 3 entities as a single trading entity

Question 7

Strong v Woodifield

Answer 7

TO FACILITATE EARNING OF PROFIT

• not DE
• payment was paid as BUSINESS OWNER not as trader
• loss not arising out of trade

Question 8

McKnight v Sheppard

Answer 8

stockbroker incurred legal expenses to defend disciplinary proceedings

• DE because HL said the sole object of expenditure was to preserve the business

Question 9

British Insulated etc v Atherton [1926]

Answer 9

enduring benefit test

Gives basic rule: is it for the enduring benefit of the trade?

If yes – good reason for treating the expenditure as capital

Question 10

Tucker v Granada

Answer 10

identifiable asset test

• identify if asset bought is a capital asset, if yes, then the expenditure is not DE

Question 11

Odeon Theatres v Jones (short version)

Answer 11

repairs on a purchased cinema, source of revenue not capital (cinema was a profit-earning asset when purchased despite its disrepair)

Question 12

Law Shipping v IRC

Answer 12

51k spent to make it seaworthy = NOT DEDUCTIBLE because it is an IMPROVEMENT (cost of repair is equivalent to addition to the price)

DAMAGE FROM ONE JOURNEY - deductible because that damage is recurrent and repair = revenue expense

Question 13

Odeon Theatres v Jones

Answer 13

money spent on repair on cinema purchased in rundown condition

= DE REPAIR

ONE – cinema was a profit-earning asset when purchased despite its disrepair

TWO – purchase price was not reduced because of that disrepair

THREE – CA accepted that the expenses were deductible in accordance with the principles of proper commercial accounting

Question 14

Transco Plc v Dyall

Answer 14

MONEY spent on inserting pipes of polyethylene in certain iron/steel pipes (comply with H&S Legislation)

• DE REPAIR
• doesn’t increase market value
• small amount each year, on-going, recurrent
• repair = complex whole renewed/replaced
• improvement = substantial whole reconstructed
• here it is repair

Question 15

Mitchell v noble

Answer 15

company paid director to retire

• DE
• CA said it was W&E
• save company from scandal
• enable directors to continue business as it had in the past unfettered by presence of retiring director

Question 16

Bamford v ATA Advertising

Answer 16

director misappropriated sums

• loss not deductible
• actions no connection w carrying on trade
• loss not incident on taxpayer’s trading activities so loss is not arising out of trade

Question 17

Newsom v Robertson

Answer 17

barrister in London travelled from his house in Whispnade

• NOT DE for travel expense because it isn’t wholly and exclusively for purpose of profession
• partly about making his workplace separate to his home

Question 18

Horton v Young

Answer 18

labour subcontractor operated from his home - costs incurred in collecting team of bricklayers and travelling to the building site

• DE because his business base and place where customers knew he would be found = home
• still exclusively for purpose of business because returning to base after working on a site during the day

Question 19

Sargent v Barnes

Answer 19

Dental surgeon called at his dental laboratory on his journeys between home and his surgery to collect dentures and to discuss work with technician

• NO DE
• not wholly and exclusively for purpose of trade

Question 20

Powell v Jackman

Answer 20

milkman on his round – not DE

office work at home but thats no different to other self-employed people
- so not DE

Question 21

Samadian v HMRC [

Answer 21

EMPLOYEE OF NHS at TWO hospitals and self-employed consultant of two private hospitals (held weekly out-patient sessions)

• cost of travel between NHS hospitals and private hospitals NOT DE

object of the travel is to carry business away from place of employment and away from place of home

Question 22

Bowden v Russell & Russell (1965)

Answer 22

Solicitor’s expenses incurred in travelling abroad partly for a holiday and partly to attend professional conferences was disallowed

Question 23

Edwards v Warmsley, Henshall & Co

Answer 23

BUT expenses incurred by an accountant in attending a profession conference abroad was allowed

Question 24

IRC v Alexander von Glehn [1920]

Answer 24

fines are not allowed as deductions against trading income

• its connected to trade but it isn’t paid for purpose of trade (paid because of wrongful act on part of company)

Question 25

McLaren Racing Ltd v HMRC [2014]

Answer 25

fine imposed for breaking sporting code

• fine was not tax deductible

Question 26

Allen v Farquharson

Answer 26

costs of pursing an appeal against an assessment are not allowable

Question 27

McKnight v Sheppard

Answer 27

legal cost in protecting business = deductible

Question 28

Netlogic Consulting [2005]

Answer 28

cost of holding a function for portential customers as advertising/promotional = DE

• money spent is entertainment but main purpose was for N to meet potential customers so it was a promotional purpose (entertainment is just incidental)