Subsistence And Fixed Deductions For The Self-Employed

Ken Moody highlights cases and legislation concerning claims for travel and subsistence by self-employed traders.

Claiming subsistence for the self-employed has been problematic for many years following the case Caillebotte v Quinn [1975] STC 265 and similar decisions. A self-employed carpenter (Mr Quinn) who worked on numerous building sites within a 40-mile radius of home was unable to go home for lunch, and so claimed the extra cost of buying lunch as a business expense. The tax inspector disallowed the claim and while the General Commissioners decided in favour of Mr Quinn, their decision was overturned by the High Court: ”a [self-employed] taxpayer, like any other taxpayer, must eat in order to live; he does not eat in order to work”. 

Although Mr Quinn had claimed only what he estimated the excess cost to be, this did not help him due to the ‘dual purpose’ test which is fatal to any argument that an expense is allowable. Where part of an expense is incurred ‘wholly and exclusively’ for business purposes, the expense may be apportioned and the business element allowed (e.g. phone bills covering both business and private calls). But it is not possible to apportion the cost of a meal between business and private purposes and where there is such a dual purpose the whole cost is disallowable.

In practice, HMRC had adopted a more amenable attitude in some circumstances and this informal concession was enacted as ITTOIA 2005, s 57A, which allows reasonable expenses on food and drink taken during the course of business travel, provided:

a) The travel expenses themselves are allowable (e.g. not in the course of travel from home to work), and

b) The trade is, by its nature, itinerant, or, the trip is outside the trader’s normal pattern of travel.

What is ‘reasonable’ is not defined by the legislation or in the HMRC guidance. There are defined rates of subsistence allowances for employees traveling in the UK for the purposes of applying for PAYE dispensations (see HMRC’s Employment Income manual at EIM05231), but at £5-£15 (at most) these are extremely modest and no rate has been set for overnight subsistence. These have no application to self-employed taxpayers anyway and also what is reasonable could be relative to the individual. HMRC guidance (in its Business Income manual at BIM37670) expresses the need for ”adequate contemporaneous records” for the expenses claimed; beyond that it may be a matter of common sense. 

The cost of overnight accommodation at a hotel or similar, together with the reasonable costs of meals taken in conjunction with the accommodation will usually be allowable, whether paid for together or separately; and one would assume that if the meal is taken in the hotel’s restaurant then the cost would usually be accepted as reasonable. 

The example given by HMRC of an ‘itinerant’ trader is a commercial traveller; a self-employed long-distance lorry driver would also be regarded as itinerant. In Sean Reed v HMRC (www.bailii.org/uk/cases/UKFTT/TC/2011/TC00969.html) the taxpayer was a self-employed scaffolder who lived in Grimsby and did some work in the York area, but most of his work was carried out in the Birmingham area, where he usually stayed during the week in rented accommodation. HMRC disallowed the travel, subsistence and accommodation costs on the basis that his business was based in Birmingham. However the FTT disagreed and found that Mr Reed’s base of operations was in Grimsby, that he was an itinerant worker, and that his travel, subsistence and accommodation costs should be allowed. 

It is well established that the cost of travel from home to work is not normally allowable and this applies to the self-employed as well as to employees. Thus it was in Jackman v Powell Ch D [2004] STC 645, that the High Court decided that expenses incurred by a self-employed milkman in travelling from home to the depot where he collected his float and milk were not allowable. His place of business was the depot. 

In Horton v Young CA 1971, 47 TC 60, a self-employed bricklayer travelled within a radius of 55 miles from his home in Eastbourne to building sites where he worked, usually for three weeks or so before moving on to the next site. HMRC argued that his place of business was each site where he worked and therefore that the travel was home to work, though they allowed the cost of travelling between sites. Both the High Court and the Court of Appeal rejected HMRC’s argument that each site was a place of business. At the High Court it was accepted that if a commercial traveller lived in London but operated around Cornwall, the cost of travel from London to Cornwall would not be allowable. 

However, Mr Horton’s situation was considered to be similar to other traders who have no fixed place of business and move continually from one job to the next and are, in that sense, itinerant (e.g. a chimney sweep). The Court of Appeal, with Lord Denning MR giving the leading judgement, considered that Mr Horton’s home was also his business base, in which case he would have been travelling from one place of business to another. 

The dictionary definition of ‘itinerant’ is travelling from place to place, especially for work, and in the Middle Ages used to refer to a circuit judge. So where does this leave your local jobbing plumber or builder? Their travel costs would appear to be allowable whether their home is regarded as a place of business or not – unless they have some other place of business to which they travel, and even then travel from there to jobs or between jobs would be allowable. 

I mentioned that in the case of Sean Reed, the cost of rented accommodation (as an alternative to more expensive hotel accommodation) was accepted as allowable. This is an issue that cropped up more recently in Tim Healy v CRC (see www.bailii.org/uk/cases/UKUT/TCC/2013/337.html), where the taxpayer, an actor whose home was in Cheshire, rented a flat in London about a mile from the Victoria Palace Theatre where he was appearing in Billy Elliot. He claimed total accommodation expenses of about £32,000, which HMRC disallowed. On appeal, the FTT found that the costs were incurred ‘wholly and exclusively’ for business purposes and that there was no duality of purpose. 

HMRC appealed to the Upper Tribunal, who decided that the FTT had made an error of law in its approach to the duality test and remitted the case back to the FTT for a further finding of fact concerning what was Mr Healy’s subjective intention when he rented the flat. However, the Upper Tribunal’s decision is interesting (for those who enjoy that sort of thing!) as a review of the various decisions concerning claims for travel, accommodation and other costs that might have a dual purpose. 

The question of whether Mr Healy was an itinerant worker came up, but the FTT declined to rule on that. However, one of the cases referred to by the Upper Tribunal was Horton v Young, whose occupation appears to have been accepted as itinerant by both the High Court and the Court of Appeal, and so there is some case law authority (as well as the Reed case) as to the meaning of the word which is now used in ITTOIA 2005, s 57A. It may be also significant that Mr Young did not stay overnight near any of the sites but drove back to his home at Eastbourne each evening. There is no indication that Mr Young claimed subsistence costs, but under s 57A as it is worded it would appear that he would have been able to do so. 

A practical obstacle to claiming for subsistence costs for traders is likely to be a lack of ‘adequate contemporaneous records’ as required by HMRC. But where such records are kept there seems to be no reason why most jobbing workers should not claim. However, since it is unclear what HMRC’s view might be in the case of local traders, an application for an informal clearance could be made and/or a note could be entered as additional information pages of the self-assessment return that subsistence expenses of £X have been claimed which may not agree with HMRC’s interpretation of ITTOIA 2005, s 57A.