Mr. Vaines was a solicitor. In the 2007/08 tax year he paid a settlement amount to a third party that had made a claim against his former partnership. His new partnership lent him the money to settle the claim. In 2007/08 the only income Mr. Vaines received was from his new partnership, and he sought to deduct the settlement amount from that income.

The Court of Appeal found in favour of HMRC that the settlement amount was not deductible on the basis that the payment had not been wholly and exclusively incurred for the purposes of Mr. Vaines' current trade.

It was noted by the Court that although a successful claim by the bank could have bankrupted Mr. Vaines, thereby preventing him from practicing as a solicitor with his new partnership, the settlement payment benefitted him generally by permitting him to continue practicing, whether with his new partnership or otherwise.

The Court of Appeal's decision reminds us that partners in a partnership or members of an LLP carry on their trade collectively and not as a collection of individual partners and, accordingly, for the settlement expenditure to be deductible it would have had to have been incurred wholly and exclusively for the purposes of the trade of Mr. Vaines' new partnership as a whole.

We are also reminded that "wholly and exclusively" questions turn largely on the specific facts of the particular case. It was noted that if the new partnership had paid the settlement amount itself, or if the payment of it had been discussed by partnership management, then the payment might have been deductible.