Key Facts
- HMRC thinks that self-employed people renting property on longer-term assignments away from home should not be able to claim tax relief for their accommodation expenditure. Both the lower and upper tax tribunals disagreed with HMRC, in a recent tax case.
- If a business expense has incidental private benefit, it may still be deductible.
Introduction
Most taxpayers will be reasonably comfortable with the general principle that hotel costs for business trips are allowable for tax purposes, but a taxpayer’s normal home expenditure is not. But what if you rent a flat for almost a year – does that still count as a business expense? HMRC thinks not. Thankfully, HMRC seems to be in a party of one, as a recent tax case has heard.
The beauty of this case is that, despite HMRC having technically won their appeal, they absolutely lost their key arguments for denying the relief, and the taxpayer seems likely to get the deductions he was initially allowed in the first hearing.
Two for the price of one...
The case Healy v HMRC was originally heard at the (lower) First-tier Tribunal last year and found predominantly in favour of the taxpayer. HMRC appealed to the Upper Tribunal, which decided that the First-tier Tribunal had applied the wrong test, so should consider the case again – so strictly, three for the price of one! The case has not yet been re-heard but there are some interesting points from the recent Upper Tribunal hearing which readers in similar circumstances might find useful.
Background
Mr Healey is an actor, living in Cheshire. A few years ago, he gained a part in a West End musical, for a period of roughly a year – the last 9 months or so he lived in rented property nearby, which cost him over £30,000. Mr Healy claimed for the cost of the rented flat, together with additional expenditure on associated meals and taxi expenses.
HMRC felt that the fact that Mr Healy rented a flat as averse to a hotel room, and for such a long time, meant that he had effectively decided to live in London, rather than merely visit for business purposes. Of course the cost of maintaining one’s home is private, not normally tax-deductible, and HMRC decided that none of Mr Healy’s expenditure should be allowed. Mr Healy stuck to his guns, and the case was initially heard at the First-tier Tribunal in 2012.
That first hearing found in favour of Mr Healy for the cost of the flat, but rejected the less valuable claims for taxi fares and meals (but arguably due to a lack of appropriate evidence of the expenditure, rather than whether the costs might theoretically be deductible).
HMRC appealed to the Upper Tribunal and, while the Upper Tribunal agreed earlier this year that the First-tier Tribunal should reconsider the case, it quite squarely disagreed with key parts of HMRC’s reasoning.
The principle – ‘Wholly and exclusively’
For the self-employed, the governing principle to a claim for tax relief is that expenditure be incurred ‘wholly and exclusively’ for business purposes. This is quite a demanding test, because there are many expenses which could have an element of private benefit – such as heat and light, clothing, etc.
Fortunately, there have been numerous tax cases which have confirmed that if the primary motive for the expense is business-oriented, then incidental private benefit may be ignored, (even if the taxpayer knows that there might be some private gain), and the cost fully deducted. One case in particular springs to mind and was considered by the tribunal judges, which readers may potentially find useful.
A case in point – Elwood v Utitz
This case involved a company director from Northern Ireland, who made numerous business trips to London. He found that the annual subscription to gentlemen’s clubs entitled him to accommodation at a far lower overall cost than paying for hotels as and when required.
HMRC (or Inland Revenue, as it then was) argued that, rather than being wholly and exclusively for the business, the club membership had a duality of purpose being also for private benefit, including “prestige, status, social standing...[and] all the amenities and facilities which the club offers”.
The NI Court of Appeal agreed that these private benefits might well have flowed from paying for membership, but was satisfied that the primary motive for the expenditure was nevertheless to secure cheap(er) accommodation in London for ‘overnight’ business trips, and the costs were allowed – note that the period of expenditure covered in this case was two years.
Perhaps unsurprisingly, HMRC considers this to be a very unusual case – see their Employment Income Manual at EIM32500 (link here).
Compared to the current Healy case
The Upper Tribunal noted that HMRC’s barrister tried to use the Elwood v Utitz case as authority that expenditure on hotels was potentially perfectly in order, apparently attempting to distinguish between acceptable hotel accommodation, and rented accommodation, which HMRC disliked. But the Utitz case involved unconventional accommodation, and found in favour of the taxpayer.
As the Upper Tribunal put it:
“We see no reason, as suggested [by HMRC’s barrister], why expenditure on rental accommodation is, except in special cases, in a different position to hotel or club accommodation”.
The Upper Tribunal also gave HMRC’s barrister a hard time. They asked him, if he were to take on a nine month legal case in another city, whether he would consider that his renting accommodation had a dual purpose, and disallow it. When he said that there would be a private element and the cost should be disallowed, the judges found his response ‘unconvincing’, and thought instead that he would – rightly – see his accommodation as taken purely for business purposes.
Conclusion
While the case has yet to be re-heard in the First-tier Tribunal, there are some useful points which taxpayers can take from the Upper Tribunal case – which creates legally binding precedent:
- The tribunal disagreed with HMRC’s argument that the private benefit implicit in taking long term accommodation (warmth, shelter and the like) effectively tainted the claim from the outset. The judges preferred to consider the taxpayer’s main reason for incurring the expenditure.
- Unlike HMRC, the judges essentially saw no distinction between renting hotel rooms and taking on the short term lease of a flat.
- Unlike HMRC, the judges were comfortable that taking accommodation to meet a longer term engagement of many months’ duration was predominantly a business expense and could be allowed – although it seems broadly that the longer the engagement, the harder it is to ‘ignore’ the private benefit that accrues.
Practical Tip :
Taking a case to tribunal is generally expensive. It is often more practical to negotiate a settlement either with the Inspector, or through HMRC’s ‘alternative dispute resolution’ service.
Your intentions when incurring the expenditure are of paramount importance, so retaining evidence of those intentions may prove extremely helpful, if arguing the point with HMRC some years later.
A point that is often overlooked is that ‘wholly and exclusively’ is NOT automatically ‘all or nothing’: even if any private or non-business benefit is too significant to be ignored, the expenditure may often be apportioned between allowable and not allowable (in line with ITTOIA 2005, s 34(2)). HMRC really needs to update its guidance at BIM37600 (link here).
Lee Sharpe
