Wholly and Exclusively vs. Dividing Costs – Mental Models for Business Expenses

What kind of title is that?!?

Before you are completely put off by the title, let me explain what I’m explaining.

First, what is a mental model?

A mental model is a concept, framework, or worldview that you carry around in your mind to help you interpret the world and understand the relationship between things.

HMRC, at times can be confusing. They seem to contradict themselves with their rules. This article will point out some of these contradictions and help shape your mental model when thinking about Business Expenses.

If you haven’t read our first article and want to start a bit easier, read It’s tax time – three things to do today

What is Wholly & Exclusively

Quick Accountant Joke: Do you know why the church can claim anything as an expense? Because they’re all holy and exclusively for business. 😊

HMRC has a concept it references often, “Wholly and exclusively”. It goes a little something like this.

If you try and write something off as a business expense, it needs to be used wholly and exclusively for your trade (your business) and cannot have any benefits for you personally that are not related to your trade.

An example HMRC uses and one that comes up often is membership at a gym. Many sole-traders, particularly in the entertainment industry need to stay in shape for work. HMRC argues that while it may be a necessary part of your job, there are non-trade gains from staying healthy and fit.

Small caveat to wholly and exclusively – incidental benefit

Before getting too crazy about personal or non-trade benefits, let’s talk about incidental benefits.

What happens if you go on a trip to the Caribbean for work. You have a bit of fun ‘personally’ and enjoy yourself, does that make this business trip is not Wholly and Exclusively for business.

Turns out, you’re allowed to have a bit of fun – an ‘incidental benefit’ if you will – with business expenses. So, don’t worry, you can enjoy yourself on your business trip.

Dividing Costs (aka the Statistical Approach)

You may think about situations like working from home, or your vehicle or your phone bill. These are all items you use personally but also use professionally.

Another mental model that HMRC uses is called the Statistical Approach. This is when you take part of an expense and categorise it as a business expense.

An easy example is rent. If you work from home, part of your home, during certain times of the day, is used for business purposes. Therefore a portion of your rent can be counted as a business expense. Same goes for your vehicle, your phone and other household expenses (water / heat / electricity / etc.).

HMRC does not specify exactly how to calculate how much of your rent you can write off, other than to give the example using rooms.

When do I use wholly and exclusively and when do I divide costs?

Unfortunately, there is no silver bullet for when to use each of the two models above.

One way we like to think about it is to ask yourself the following question. Can you tell me exactly when you were using the thing (that you’re expensing) for business and when you were using it for personal? If your explanation sounds ridiculous, then you probably can’t claim it as a business expense.

Let’s look at a few examples:

Phone: Yes, I can go through my phone calls and tell you exactly which phone calls I use for business and which I use for personal. Same with time looking at e-mail on my phone.

Gym: No, I cannot tell you exactly which bench press reps were used for my business versus me personally.

Vehicle: Yes, I can tell you exactly which miles were driven for work and which miles were driven personally.

Haircut: No, I cannot tell you exactly which hairs were cut for business and which hairs were cut for personal. *

* Note on haircuts: if you went to get a haircut or blow out specifically for an audition or role (as an actor) and you would not have had to get that haircut or blow out personally, then you can write those off as a business expense and count any other benefit as an incidental benefit.

Reasonable(-ness)

HMRC also falls back on the word “reasonable”. Too many people try to bend the rules (Simply business compiled a list of some funny ones), so HMRC has these concepts to cover themselves.

“You’ll need to find a reasonable method of dividing your costs…” -HMRC.gov website

Bottom line: if you can reasonably argue something as a business expense, then you can write it off.

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