The hot weather often brings thoughts of holidays, but for those in business, work is always on the mind. So, what is the tax position if you combine business with pleasure by visiting a supplier in the area where you are also on holiday?
As a general rule, if you operate as a business, you can deduct expenses incurred ‘wholly and exclusively’ for the purposes of the trade. This test will be met where an expense is incurred solely for business purposes. However, in reality, it is sometimes not easy to separate everything into clear categories of ‘business’ and ‘private’.
Identifiable proportion
The ‘wholly and exclusively’ test, while a crucial criterion, does not have to be applied to the expense as a whole. HMRC acknowledges this and allows for a degree of flexibility in identifying the business element of an expense. Consequently, the extent to which it is possible to claim a deduction where there is both business and private use depends on whether it is possible to identify the business element. The split between business and private can be made using any reasonable basis for apportionment, which provides some leeway in applying this test. What is important is the nature of the expense.
Duality of purpose expenditure
Where expenditure has a dual purpose and cannot be split between business and private elements, the ‘wholly and exclusively’ test is not met and consequently no deduction is permitted. HMRC is very strict about dual-purpose expenses; the expense usually quoted is the running of a car used partly for business and partly for private purposes.
In the example of a business/holiday, if a business owner drives to Exmouth on holiday but then makes a separate trip from Exmouth to Exeter to meet with a supplier, the cost associated with the business trip to Exeter and back only will be allowed. It is advisable to keep a mileage log incurred for business visits and then a claim can be made just for the business mileage. Hotel costs will not be allowed.
The legislation provides:
‘If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.’
Intention is important such that should the main purpose of the trip be personal but then you decide to do some business whilst there, you have waived your right to claim any expenses.
Incidental private benefit
In some situations, there may be an incidental private benefit associated with what is essentially a business expense. If this benefit is not significant, its existence will not prevent the expense from being deductible.
If the sole purpose of the trip is for business reasons, the expense will usually be allowable in full, notwithstanding any incidental private benefit. For example, if you travel to Spain solely for the purpose of meeting with a supplier, the fact that you are able to enjoy pleasant weather whilst there does not negate the deductibility of the trip’s cost.
Practical tip
As with all expenses, proper documentation is crucial. Whether tickets to an event or minutes from a meeting, having these records can substantiate the business-related travel. If you have a limited company, it is advisable to pay for the flights via the company bank account. HMRC has been known to scrutinise airline tickets to verify the business nature of overseas trips including whether the business owner was accompanied by their spouse, civil partner or family. The costs relating to non- business partners or employees will have to be adjusted.
Partner note:
S34 ITTOIA 2005.
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