income tax business deductions : general principles - L12 Flashcards
l12 (20 cards)
How are business profits calculated under GAAP?
By deducting any expense GAAP would allow, unless statute prohibits it.
What did Usher’s Wiltshire Brewery Co Ltd v Bruce establish?
GAAP-based deductions apply unless specifically disallowed by law.
What if expenditure can be recovered by the taxpayer?
It’s not deductible – Rutter v Charles Sharpe & Co Ltd.
Can spending for future receipts be deducted now?
Yes, Vallambrosa Rubber Co – unless accounting practice spreads it.
What did Gallagher v Jones say about spreading costs?
Expenditure must be spread if GAAP requires it.
What are the two key statutory prohibitions on deductions?
No deduction for (1) capital expenditure (s.33) or (2) non-business expenditure (s.34).
What is required by s. 34 ITTOIA 2005?
Expenditure must be wholly and exclusively for the purpose of the trade.
What did Strong & Co v Woodifield decide about “purpose”?
Must be for the purpose of making profits – not just related to business activity.
What if the purpose is indirect profit-making, like advertising?
It still qualifies – British Insulated and Helsby Cables v Atherton.
What did Mallalieu v Drummond establish?
No deduction if there is any dual (even subconscious) purpose, e.g., for warmth/decency.
Can subconscious motives block a deduction?
Yes – sole purpose must be business, not mixed.
Can a single cost be apportioned into business and personal parts?
Yes, s. 34(2) ITTOIA 2005 allows apportionment.
What is a simple example of apportionment?
Petrol costs used part for business and part for private use.
What are “unit costs” vs “standing costs”?
Unit = divisible (like petrol); Standing = fixed (like insurance or road tax).
What does HMRC say about apportioning standing costs?
Usually allowed (e.g. for cars – BIM37600), but not always (e.g. flights – BIM42525).
What’s Kerridge’s view on apportionment?
Only extra cost solely for business should be deductible – difficult to prove.
What’s Grout’s argument about apportionment?
Should only be allowed where there’s objective factual division – not subjective intent.
What’s an example of non-apportionable cost per Grout?
Surgery to play guitar for both hobby and work – no objective way to split.
What’s the criticism of HMRC’s approach?
Freedman says it gives HMRC too much discretion, causing unfairness.
What’s the overall rule for deduction under s. 34?
Must be solely for earning profits; if mixed purpose or non-business, it’s disallowed.
