In the following two recent Tribunal decisions, HMRC challenged expenditure with duality of purpose. This can often be a contentious area of tax and as such these cases may be of interest to practitioners and their clients.

Both cases highlight the importance of establishing that expenditure has been incurred 'wholly and exclusively' if it is to be deductible for tax purposes. Key to this decision is establishing if there is a clear connection between the expenditure and the trade being carried on, and that there is no other different motive for incurring the expenditure not directly relevant to the business.

This case considered whether a deduction was available for rent payable under a 9 month tenancy agreement whilst an actor appeared in a stage production. The specific issued considered was whether these expenses were wholly and exclusively incurred for the purposes of the actor's profession.

Background

The taxpayer, a professional actor entered into a contract to appear in “Billy Elliot the Musical” in 2004. He rented a flat just over a mile from the theatre, for a fixed term of 52 weeks and as a result he claimed a total of £32,503 for accommodation expenses in 2005/6 as an expense against his self-assessment income. This expenditure only covered the 36 week period in which the taxpayer was performing in the musical and not for the full twelve month period of the tenancy agreement.

HMRC's decision was that the taxpayer was not entitled under section 34(1)(a) of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) to deduct these accommodation expenses. The taxpayer appealed that decision to the First-tier Tribunal (FTT).

The appeal before the FTT also related to certain expenses for subsistence and taxi fares. The taxpayer appeal was dismissed in relation to those expenses and he did not pursue those claims any further.

Before the FTT the taxpayer had argued that he was an “itinerant worker” who worked in a variety of venues even when Billy Elliot was on in London. This was on the basis that his wife and family remained in Cheshire while he was working on the Billy Elliot production and his address for correspondence and communication remained as the address in Cheshire. He argued that he did not move to London and his base remained in Cheshire.

HMRC did not accept that argument but contended that he moved to London as his base for the period of his involvement in the Billy Elliot production. Consequently, they contended that he did not show that the expenditure on accommodation was wholly and exclusively incurred for the purposes of his profession.

The FTT found in favour of the taxpayer and concluded that the accommodation expenses were deductible. The final decision was reached on the basis that he had retained his home in Cheshire, and that the only reason he took the tenancy was because he was working in London.

HMRC appealed against that decision to the Upper Tribunal (UT) contending that the FTT erred in law in failing to consider, or consider properly, whether the taxpayer had a dual purpose in incurring the expenditure in question, namely to meet his ordinary needs for warmth and shelter as well as his stated business purpose. They contended that had the FTT applied the correct test plainly it would have found that such needs were included amongst the purposes of the expenditure and accordingly the appeal should be simply allowed rather than remitted to the FTT to be decided again.

Decision

The UT agreed with HMRC, and in outlining their decision presented a useful summary of the principles of the wholly and exclusively test.

The following principles can be derived from this decision and an analysis of the authorities:

• The "exclusively" limb of the "wholly and exclusively test" entails examining whether the expenditure in question has a dual purpose. If the expenditure is not solely for a business purpose it will not be deductible (Bentleys, Stokes; Lowless, Mallalieu v Drummond)
• Expenditure on items that outside a business context simply meet ordinary needs can be regarded as having solely a business purpose. This includes food and drink in the context of business lunches (Bentleys, Stokes & Lowless), hotel accommodation in the context of business trips or conferences (Elwood v Utitz) and accommodation for an itinerant trader (Sean Reed)
• Consequently, there is a distinction between effects which are aimed at (the purpose of the expenditure) and those which are incidental to that aim; the latter do not necessary color the former, even if they are inevitable (Elwood v Utitz and the third passage from Mallalieu v Drummond)
• Expenditure will not be deductible unless there is a clear connection between the expenditure incurred and the trade or profession in question (Caillebotte v Quinn, MacKinley v Arthur Young, McClelland Moores), and a distinction must be drawn between living expenses and business expenses (Newsom v Robertson)
• The fact that an item of expenditure may be necessary for an individual to conduct his trade does not mean that it passes the "wholly and exclusively" test (Newsom v Robertson)”

The UT hearing having considered the facts agreed that the FTT had not fully considered the duality point and that the case should be referred back to them for reconsideration of these facts including ascertaining from the taxpayer his intentions and reasons for renting the property.

The full text of the case is available at http://www.tribunals.gov.uk/financeandtax/Documents/decisions/hmrc-v-tim-healy.pdf