Travel and subsistence - another blow for the self-employed

A decision has just been released in the case of Tim Healy - it remains to be seen if this will be appealed further. It is a further blow for taxpayers in their on-going battle with HMRC relating to travel and subsistence costs for the self-employed.

This case related to expenses claimed for accommodation of £32,503, subsistence of £4,094 and taxi fares of £4,080, which the taxpayer included in his 2005/06 return. In the original Tribunal case (TC01940: Tim Healy March 2012 First tier Tribunal), the taxpayer stated that he lived in Cheshire since and, in December 2004, agreed to appear in Billy Elliot and rehearsals took place in London between December 2004 and March 2005, during which time he stayed at a friend's apartment. In April 2005 Mr Healy leased a flat in London, just over a mile from the Victoria Palace Theatre and claimed the rental costs of this during the period he appeared in the show from April to December 2005.

Mr Healy argued that he was an itinerant worker throughout the whole period when he was in London, as he was working in a variety of venues throughout out the year, even when Billy Elliot was on. He argued that he could not have gone home to Cheshire every night after evening performances and had the option of staying in a hotel but opted to rent a flat because it was cheaper and there were less security issues than staying in a hotel. However, his base remained in Cheshire.

HMRC did not accept that Mr Healy was an itinerant worker and that London was his base in that period. HMRC referred to the case of Newsom v Robertson [1952] 33TC452, which involved a barrister carrying on his profession partly at home and partly at chambers. It was held that his motives for travelling between these two places were mixed and therefore failed the 'wholly and exclusively' test. The Tribunal found that:

'On balance I find that the need to find accommodation in London, so that he had somewhere to stay near the Victoria Palace Theatre, was wholly and exclusively in connection with his profession as an actor. He was not seeking a home in London. I do not find there was duality of purpose.

If Mr Healy had stayed in a hotel he may have found it necessary to eat in the hotel and a record would have been kept in the hotel of the expenditure on food and drink. Reasonable expenditure on subsistence in a hotel might well be found to be incidental to the expenditure on accommodation without a finding that there was duality of purpose.'

The Tribunal considered that expenditure on subsistence in a flat cannot be treated as incidental to the rental of that flat in the same way as expenditure on food in a hotel where one is resident.

The cost of his expenditure on food eaten in restaurants or clubs has to be considered under the test in s34(1)(a) ITTOIA 2005 i.e. was the expenditure wholly and exclusively for the purposes of his profession?

Living in a flat gave Mr Healy the opportunity to expend money on subsistence in the same way as he would have done had he been living at home. There was no evidence to show that he had to eat out, or that he had to eat more, or in a special way or at particular times and so the expenditure was not wholly and exclusively incurred.

The taxi fares were disallowed as well as there was insufficient evidence that the wholly and exclusively test was satisfied.

HMRC appealed (R&C Commrs v Healy July 2013 Upper Tribunal (Finance and Tax)) and the case was referred back to the First tier Tribunal:

'...the FTT needed to consider whether in all the circumstances of the case, the sole purpose for renting the flat was in order to carry on his profession of an actor'.

If that had been H's sole purpose, the expenditure would be deductible, but if there was a dual purpose, the expenditure would not be deductible.

The re-hearing (TC04425: Tim Healy May 2014 First-tier Tribunal)

The earlier decision of the First-tier Tribunal found that:

'On balance I find that the need to find accommodation in London, so that he had somewhere to stay near the Victoria Palace Theatre, was wholly and exclusively in connection with his profession as an actor. He was not seeking a home in London. I do not find there was duality of purpose.'

The Upper Tribunal found that this was not a correct application of the principles. The correct approach to the wholly and exclusively test is to consider it by reference to the dual purpose test i.e. whether, in all the circumstances of the case, the sole purpose for renting the flat was in order to carry on his profession of an actor.

Mr Healy as an actor may be offered a series of short term assignments away from his home in respect of which he may claim deductible hotel or other accommodation expenses, or he may obtain a longer assignment, such as that in Billy Elliot and decide to take a tenancy of a flat. If he in his own mind viewed those different circumstances on entirely the same basis, namely that the sole purpose of the accommodation was a business purpose, then in our view there is no reason why in principle he should not be able to deduct the expenditure in both cases. There is no hard and fast rule as to when the length of the assignment clearly tips the balance in favour of a conclusion that there is a dual purpose; it will be a matter of fact and degree in the particular circumstances.

It is therefore essential that the Tribunal in such a case should make a finding as to whether the taxpayer viewed the assignment as a short term assignment that might develop into a longer assignment or always saw it as a longer term assignment. Taking the terms of the performance contract and the tenancy agreement together (which Mr Healy seems to have done as the two week break clause in the tenancy agreement is consistent with the right in the performer's contract for the theatre to terminate the production on two weeks notice) he may all along have considered the assignment to be of a temporary nature.

In view of these factors we are unable to conclude that the application of the correct legal test would inevitably result in the expenditure not being deductible...'

The taxpayer stated that travels to wherever he needs to for work, in the UK and abroad, to work in studios, on stage and on location. Modern technology allows him to do some voiceover work without physically attending the studio that records him. The taxpayer has an office at his home in Cheshire where he regards himself to be based as an actor. It is there that agents contact him and that he reads and learns scripts, receives, signs and negotiates contracts and deals with his correspondence

There were eight performances a week, on Monday to Saturday nights and matinees on Thursdays and Saturdays. During the period of his participation in the production, the taxpayer returned home to Cheshire on Saturdays after the evening performance and returned back to London on Mondays. His office remained at his home in Cheshire throughout, and he dealt with correspondence there over the weekends. He attended a small range of different promotional and charitable events during his time off. He was not engaged exclusively under the Billy Elliot contract and during the period of the production, he also received royalty income and was engaged to work on a range of different projects at different locations.

The taxpayer argued that he was required to work and rehearse in London. He did not make a home in London. The base of his operations was in Cheshire. An actor, having to travel away from their base of operations to perform in different theatres, is no different to a bricklayer having to travel away from their base of operations to work on different building sites. The taxpayer claimed expenses for his travel between Cheshire and London and HMRC did not disallow this claim. It was not possible for the taxpayer to return home to Cheshire each night.

Accommodation

The Tribunal concluded on the evidence that the taxpayer from the outset had a dual purpose in incurring the expenditure on the rental of the flat, which had three bedrooms:

'One purpose was a business purpose. The other purpose was a non-business purpose of having accommodation space in which he could receive visitors. The 'wholly and exclusively' test in s 34(1) ITTOIA is therefore not satisfied. In the circumstances, it is ultimately not necessary for the Tribunal to reach a view on whether the expenditure also had yet a further non-business purpose of meeting the Appellant's ordinary needs for warmth and shelter.

In the present case, there was no evidence before the Tribunal as to the floorplan of the flat in question. The evidence is that it had three bedrooms. Presumably it also had a lounge, kitchen and bathroom. Visitors would presumably have used not only bedrooms, but also the lounge, kitchen and bathroom. Indeed, there was not even evidence before the Tribunal that one bedroom was used exclusively by the Appellant.

The Appellant has submitted that if there is a duality of purpose, a proportion of the expenses should be allowed, 'to be determined on a just and reasonable basis by the Tribunal taking into consideration suitable methods of apportionment'. However, the Tribunal has no general jurisdiction to reach decisions on the basis of what is 'just and equitable'. It must apply the law. For s 34(2) ITTOIA to apply, there must be an 'identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade'. On general principles, the burden is on the Appellant to identify the 'identifiable proportion'.

The Tribunal is not persuaded on the evidence before it that it has been established that there was any identifiable part or identifiable proportion of the amount spent on the rent for the flat which was incurred wholly and exclusively for the purposes of the trade.'

Subsistence and taxi fares

The Tribunal found that the taxpayer had not actually appealed the original decision regarding these expenses. However:

'For completeness, the Tribunal adds that it would have dismissed any appeal by the Appellant in relation to these other expenses in any event, due to the absence of sufficiently detailed evidence as to the amounts and purpose of the claimed expenditure.'

The appeal was dismissed.

What to do next?

Although Mr Healy has lost his case for the time being, not too much emphasis should be put on the decision. The main reason for the defeat was that it was admitted that it was always the intention that friends and family could stay in the flat, so creating a clear duality of purpose. The Tribunal did not comment on what the position would have been had this not been the case. It does illustrate, though, how careful the self-employed need to be with their travel and subsistence claims.