Tax - the Holly Grail of the "wholly & exclusively" test

Once a landlord has decided an expense is a revenue expense, they must apply the ‘wholly and exclusively’ test.

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This rule says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes. Tax inspectors will want to see documentary proof of contentious expenses – like documents, agreements, notes of meetings and any other records – so make sure you keep detailed and organised records to prove your expenses.

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The taxman will listen to what you say about why you are claiming an item as a business expense, but will look at disproving at what you say unless you can back it up with documentary evidence.

EXAMPLE

For example, a property owner lives in London and also owns a cottage in Cornwall. The cost of travelling to Cornwall for a family holiday will fail the ‘wholly and exclusively’ test even if the property owner says the visit was to inspect and prepare for a letting. This is called a ‘dual purpose’ expense.

Dual-purpose expenditure

If an expense is not wholly and exclusively for the rental business, then strictly, it should not go in the accounts. In practice, some dual-purpose expenses include an obvious part spent for the purposes of the business. Tax inspectors are told to allow a proportion of dual-purpose expenses that are ‘apportioned’. When expenses may be apportioned HMRC guidance for tax inspectors says they may allow a proportion of an expense when a definite part or proportion of it is wholly and exclusively for the purposes of the rental business. Where a definite part or proportion of an expense is wholly and exclusively incurred for the purposes of the business, that part or proportion can be deducted.

EXAMPLE

An example is the revenue running costs (including standing charges and hire-purchase interest) of a car or van used partly for business and partly for private purposes. If 20% of the car mileage is business mileage, deduct 20% of the running costs of the car, including standing charges.

Keep a business mileage log for each trip, recording:

- The date of the journey
- The start and end point
- The business reason for the trip
- The miles travelled.

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