Tax

Healy v Revenue and Customs Commissioners

The taxpayer was a professional actor engaged in a musical in London. He deducted certain expenses relating to accommodation, including taking on a tenancy, in the sum of £32,503 in his income tax self-assessment. The appellant Revenue and Customs Commissioners (the Revenue) decided that the taxpayer was not entitled, under s 34(1)(a) of the Income Tax (Trading and Other Income) Act 2005, to deduct those expenses.

The First-tier Tribunal (Tax Chamber) (the FTT) allowed the taxpayer’s appeal against the Revenue’s decision, as he was not seeking a home in London. The Revenue appealed on the ground that the FTT had erred in law in failing to consider, or consider properly, whether the taxpayer had a dual purpose in incurring the expenditure, namely, to meet his ordinary needs for warmth and shelter, as well as his stated business purpose. It contended that the tribunal should simply allow the appeal and not remit the matter to the FTT as, if the FTT had taken into account the taxpayer’s ordinary needs for warmth and shelter, it would inevitably have found that such needs were included amongst the purposes of the expenditure.

 It fell to be determined: (i) whether the FTT had erred in its approach; and (ii) whether the tribunal should simply allow the appeal. The appeal would be allowed.

(1) It was settled law that a distinction had to be drawn between an expense that was necessary to enable a profession to be carried out, and that which was wholly and exclusively incurred for the purposes of that profession. The exclusivity limb of the wholly and exclusively test entailed examining whether the expenditure in question had a dual purpose. If the expenditure was not solely for a business purpose, it would not be deductible.

However, expenditure on items that, outside a business context, simply met ordinary needs could be regarded as having solely a business purpose. In relation to accommodation costs, it would often be the case that, in the nature of things, one of the purposes of the taxpayer incurring the expenditure would be their ordinary needs for warmth and shelter (see [38], [66] of the judgment).

In the instant case, the FTT had failed to apply the wholly and exclusively test properly, and had made an error of law. It had focused purely on the issue as to whether, in taking on the tenancy, the taxpayer had been seeking a home in London. Therefore, it was clear that the FTT had deliberately not considered the question as to whether the shelter and warmth that inevitably followed from arranging accommodation had been anything more than incidental to the business purpose that the taxpayer had had in mind (see [68], [70], [72] of the judgment).

Bentleys, Stokes and Lowless v Beeson (Inspector of Taxes) [1952] 2 All ER 82 applied; Newsom v Robertson (Inspector of Taxes) [1952] 2 All ER 728 applied; Elwood v Utitz (Inspector of Taxes) 42 TC 482 applied; Caillebotte (Inspector of Taxes) v Quinn [1975] 2 All ER 412 applied; Mason v Tyson (Inspector of Taxes) 53 TC 333 applied; Mallalieu v Drummond (Inspector of Taxes) [1983] 2 All ER 1095 applied; MacKinlay (Inspector of Taxes) v Arthur Young McClelland Moores & Co [1990] 1 All ER 45 applied; Prior (Inspector of Taxes) v Saunders [1993] STC 562 applied; McLaren v Mumford (Inspector of Taxes) [1996] STC 1134 applied.

(2) The facts found had not inevitably led to a conclusion that there had been a dual purpose. The tribunal was unable to conclude that the application of the correct legal test would inevitably result in the expenditure not being deductible. It was necessary to establish on a subjective basis what had been in the taxpayer’s mind when he had entered into the tenancy agreement. Not having the taxpayer before the tribunal, it was unable to carry out that exercise and it was properly a matter for the FTT (see [80] of the judgment).

The FTT decision would be set aside and the matter would be remitted to the FTT for a fresh hearing (see [86], [87] of the judgment). Mallalieu v Drummond (Inspector of Taxes) [1983] 2 All ER 1095 distinguished.

Dennis Wren (instructed by Bowker Orford, Chartered Accountants) for the taxpayer; Oliver Conolly (instructed by the General Counsel of Solicitor to Revenue and Customs Commissioners) for the Revenue.