Trading Expenses 23rd January 2016

Posted in: Business Tax, Corporation Tax, Personal Tax

What expenses you can claim for depends on your status – employee, sole trader / pertnership or company.

We will look at each in turn.

Employee: Expenses of employment

Any expenses reimbursed by the employer to the employee should be treated as cash earnings. It is then up to the employee to make a claim against earnings for the expenses incurred vi the self assessment (this is not the whole story, as typically an employer would have applied to HMRC for a dispensation, such that any reimbursed expenses need not be treated as earnings and the employee need not make a claim on their self assessment).

What expenses can an employee claim for?

The general rule

The general rule that applies is that under s.336 ITEPA 2003, which is the “wholly, exclusively and necessarily” rule. It is where the employee is obliged to incur and pay the expense in the performance of their duties. HMRC will ask “could the employee do his job without incurring that particular expense?” That is, was it necessary. This requirement makes it extremely difficult for employees to claim expenses as a deduction against taxable employment income.

Concerning the wholly and exclusively element, if there is any dual purpose to the expense, then the expense will be disallowed as a deduction. The most recent famous case of this concerned Sian Williams, the newsreader. Ms Williams claimed deductions for the cost of purchasing and laundering the clothing she wore while reading the news and for the costs of professional hair styling and colouring.

One has to wonder why Ms Williams tried to claim these as expenses of employment, since this is a scenario that has been tested a number of times. However, this is not as clear cut as it seems, as we shall see later.

Hillyer v Leeke (1976): Mr Hillyer was a computer engineer who was required by his manager to wear a suit and tie at work. He only wore his suit and tie at work and they suffered excessive wear and tear as a result of the nature of his duties. It was held in the High Court that no deduction was due for the cost of the clothing.

The cost of the clothing was not incurred wholly and exclusively in the performance of Mr Hillyer’s duties. At the same time as he was wearing the clothing for work it was also meeting his need for warmth and decency.

This was the principle applied in Mallalieu v Drummond (1983) and has been the defining case on clothing for many years.

The case of Mallalieu v Drummond concerned the issue of whether a barrister was entitled to a deduction for expenditure on replacement and laundering of professional clothes.

The barrister, in accordance with Bar requirements, acquired and wore particular items of clothing, both in court and to and from the court to her chambers. The clothing was such as might be used for ordinary civilian purposes but she did not wear such clothing away from work. The barrister preferring to wear coloured clothes of a more adventurous style of which she had an ample supply. The wearing of her court clothes necessarily spared her private wardrobe from wear and tear but this was not a consideration in her mind when she bought the court clothes, any more than was the preservation of her warmth and decency. The barrister bought the court clothes only because she would not have been permitted to appear in court if she had not worn them.

Lord Brightman reviewed the Commissioners’ findings of fact and the taxpayer’s evidence that her only purpose in buying the disputed clothing was to satisfy the requirements of her profession, giving no thought to the provision of warmth and decency.

The judge accepted that the taxpayer thought only of the requirements of her profession when she first bought (as a capital expense) her wardrobe of subdued clothing. The judge also considered that as and when she replaced items or sent them to the launderers or the cleaners she would, if asked, have repeated that she was maintaining her wardrobe because of those requirements. It is the natural way that anyone incurring such expenditure would think and speak. But she needed clothes to travel to work and clothes to wear at work, and he thought it inescapable that one object, though not a conscious motive, was the provision of the clothing that she needed as a human being.

So does this mean all work clothing is ruled out as a deductible expense?


Lord Brightman explained that the costs of uniforms and protective clothing would not be disallowed by this decision. It is a question of fact and degree. The cost of specialist clothing required to discharge the duties of the trade, profession or vocation is allowable.

So that’s the end of the matter, right? Sadly no. There are grey areas.

Actors and entertainers can claim for the cost of their “costumes”. What this means in reality is that a TV presenter may be considered to be an entertainer and can claim for the cost of their clothes for work.

This was demonstrated by Richard Madeley and Judy Finnigan in a tax case brought before the Special Commissioners in 2006. It was held that Richard and Judy are not merely presenters, but entertainers who perform an act. Therefore, just as actors may claim for the cost of their costume used in an act, Richard and Judy can claim for the cost of their clothing.

This leads to some strange situations, where you could have an interviewer interviewing an interviewee (say an architect), both wearing identical outfits bought specifically for the interview, yet the architecht cannot claim for the cost of their clothing while the interviewer can. Likewise, actresses who purchase expensive designer dresses for the premier of a new film can claim for the cost of the dress, even though it clearly has dual purpose and private use if worn again, say on a night out.

The reason we have this situation is due to strong lobbying from Equity, the actors union. This also has implications for other trades, such as dancers. Of course, this all makes nonsense of the reasoning in Mallalieu v Drummond, but we are stuck with it.

Other expenses employees may claim for are:

  1. Travel expenses – there are special rules for these
  2. Subsistence costs (meals) – again special rules apply
  3. Payments to an occupational pension scheme
  4. Professional fees or subscriptions to an organisation approved by HMRC – see this link
  5. Donations to charity under the Payroll Deduction Scheme

Sole trader / partnership

For a business to claim expenses, the criteria are not as strict. The business need only show that the expense was “wholly and exclusively” incurred for the purpose of the trade.

Where there is duality of  purpose the expenditure is still disallowed. However, some expenses can be apportioned between business use and personal use. The business element is allowed, while the personal element is not. This may at first glance seem odd, but what this is really saying is if we can say for example that for x amount of the time the expenditure related to business use and y amount of time it related to personal use then we can apportion the expense. For example, vehicle fuel can be apportioned by recording business mileage against total mileage, but you can’t really do that with clothing.

Capital expenditure which attracts capital allowances have their own rules, but again we can apportion the capital allowances between business and personal use.

Strictly, the Mallalieu v Drummond case (above) belongs in this section, since barristers are self employed – this was an example of HMRC applying the “wholly and exclusively” test to the self employed.

What about expenses such as pensions?

If the pension contributions are made on behalf of the sole trader or partner, then they are for personal requirements and are disallowed. However, if they are made by the sole trader or partner on behalf of an employee in the business, then they are allowable business expenses.

Motor expenses – servicing and repairs?

If made on behalf of the sole trader or partner, then it is likely there will be a personal element that will be disallowed. If made on behalf of an employee, they will be deductible business expenses. However, they will give rise to an employee benefit reportable on the P11D.

As for employees above, special rules apply for expenses such as travel and subsistence, albeit slightly different rules.


For companies the situation is more straight forward.

Again we must apply the “wholly and exclusively” test. In this case, where there is a business element and a personal use element, the expense will give rise to an employee benefit (unless there is an exemption, such as in the case of mobile phones). Provided the expense meets the “wholly and exclusively” criteria, the expense will be allowed.

I’ll look more closely at travel and subsistence expenses in my next blog. Since writing my previous blog on travel expenses the rules have changed. The main way in which they have changed is to capture the travel expenses of contractors typically caught by the IR35 legislation.