The Upper Tribunal case of Samadian v HMRC published earlier this year (2014, UKUT 0013) has revived one of HMRC’s all time favourite hobby horses, that of where a travelling expense involves a dual purpose. As most readers will know, in general expenses must be incurred ‘wholly and exclusively’ for business purposes to be allowable for tax deduction. Those wishing to dust off old tax tomes may recall that two famous cases, Ricketts v Colquhoun and Newsom v Robertson, established some basic principles in HMRC’s favour; that travel between home and ones normal workplace is considered to be at least incurred partly by personal choice, and is undertaken primarily ‘to get to/from home’ (rather than to reach another workplace to perform duties). In short both cases failed the ‘wholly and exclusively’ test.
In the Samadian case, the taxpayer was a senior medical professional who travelled regularly between home, his private practice, and his NHS employment. Both Upper and Lower tax tribunals have reinforced the HMRC view that travel between home and the private practice (in a regular and predictable pattern) is little different to the aforementioned cases. Perhaps more harshly the Tribunals also came to the view that regular travel between the NHS employment and the private practice also failed the duality of purpose test.
Even though this Upper Tribunal case does not in itself appear to create a new legal precedent (there are already adequate cases in existence), HMRC appears anxious to reinforce the ‘win’ by preparing further guidance, which has been drafted and is expected to be issued for public consumption very shortly (contrast this approach with the wall of silence which followed HMRC losing the Court of Appeal decision involving Total People Ltd’s NIC reclaim on mileage payments; a case which does clearly create new legal precedent, despite HMRC protestations to the contrary).
Whilst this updated HMRC guidance is intended to apply initially to the medical profession, it is a timely reminder that the duality of purpose hurdle has to be considered by all who make claims to deduct expenses on business. In the case of employees’ travel expenses there are of course additional statutory tests which determine whether one or more Permanent Workplaces exist – if so travel to reach there (from home or any other private place) is seen as Ordinary Commuting i.e. private travel.
When we move away from travel and consider other expenses, the rules if anything become even more blurred. Whilst an employed worker (including an office holder e.g. a director) does also have to show that such expenses are incurred ‘necessarily’ in performing the duties (i.e. that the job rather than personal preference dictates the need for the expense), in most cases the main barrier remains the ‘wholly and exclusively’ test. Although the statutory tests remain similar, the distinction between those who are self-employed and those who are employed also becomes more tenuous.
For example, if a self-employed individual works from home to earn a living, HMRC would normally regard household expenses as partially meeting the wholly and exclusively test so that a proportion of the costs will be allowable . The common HMRC view here is that there will be a specific part of the expense which is wholly and exclusively incurred for business purposes and is therefore allowable. Consider the worker turning on the heating whilst carrying out his/her trade: that specific part of the heating bill is incurred wholly and exclusively for the purposes of the trade (this contrasts with say a regular journey to work where the whole journey could have a dual purpose).
Whilst this is a subtle distinction it is at least understandable. However this does not fit transparently with HMRC’s reluctance to permit a similar proportionate deduction for ‘working from home’ expenses incurred necessarily by employees. The published guidance on home working expenses indicates that only the marginal and specific additional costs of necessary home working are deductible, and that any flat rate charges e.g. for Council Tax, Rent and Water Rates (which, HMRC asserts, would be incurred anyway) will not be allowed. It is interesting to note that HMRC appears to have implemented a tougher interpretation in this area with effect from the tax year 2006/07, without (apparently) establishing any clear additional legislation or case law precedent in support of this approach.
One thing to add here is a reference to the permitted Homeworking Allowance which may be paid to employees tax free. Whilst the sums involved (currently a maximum of £4 per week) will not set the world alight, one advantage is that the exemption relies on a simple defacto test of whether the employee regularly works from home under arrangements agreed with the employer. In particular there is no ‘necessary’ test, so for instance an employee who ‘volunteers’ to work from home should not see the claim disallowed on the basis that ‘each and every’ such employee may not necessarily incur the expense.
When considering deductions on clothing for example, the rules if anything become even more stringent. The HMRC view is that ‘ordinary wardrobe’ clothing is likely to have a dual purpose and therefore is not allowable. As illustrated in the tax case of Mallalieu v Drummond as well as earlier cases, such clothing is likely to be used for ‘warmth and decency’ (with a few exceptions, no doubt including the current crop of ‘D list’ tabloid celebrities) as well as for business. To qualify, the clothing therefore must be either protective in nature or worn as part of a uniform which easily identifies the individual as part of that organisation etc (e.g. containing a conspicuous logo).
In summary, and whilst some of these principles were developed at a time when business travel was almost exclusively undertaken in one’s horse and cart (and long before reality TV became the nightmare that good taste forgot!), the Samadian case is a timely reminder that HMRC still remains prepared to adopt a rigorous defence of its views on duality of purpose.