Latest case on ‘wholly and exclusively’ and the deductibility of legal expenses

The latest taxpayer victory – in Linslade Post Office & General Store [2012] UKFTT 457 (TC) – means that the definition of wholly and exclusively is wider than previously thought.  The decision was published on 30 July 2012.


Two brothers carried on a partnership.  Their sister alleged that she had contributed funds to the capital of the partnership and had become an equal partner.  Her claim was dismissed by the High Court.  The two brothers incurred legal fees in defending this claim.  They deducted these costs when calculating the business profits.

HMRC argued that the legal fees were not a deductible trading expense: the individuals had paid legal fees to defend their interests against their sister, and that did not constitute an expense incurred wholly and exclusively for the purpose of the trade.

The decision

The First-tier Tribunal rejected HMRC’s contention.  They stated that “the true nature of the proceeding was a defence of an unjustified claim in order to preserve their assets of the business.”  Deductible expenditure includes money spent with a view to preserving an asset.  What is more, “the fact that the preservation of the business assets may be so significant as to go to the possible survival of the business itself is not sufficient to tip the nature of the expenditure from revenue to capital.”

This is a surprising decision as previously it was thought that such expenses would not be tax deductible.

How does this decision affect practitioners?

Practitioners should give careful consideration to whether legal expenses are tax deductible.  Where legal expenses are incurred with a view to preserve an asset, they are deductible for income tax purposes.

Note also the case of Purolite International Limited.

If you would like further information in relation to which business expenses are tax deductible please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.