BIM37677 - Wholly and exclusively: duality of, or non-trade, purpose: non-travel topics: accommodation and subsistence: renting accommodation while living away from home
S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009
There is no automatic exclusion for an accommodation expense
Accommodation costs may only be claimed where the sole purpose for incurring the cost is a trade purpose. Dual purpose expenditure is excluded; however, you need to examine all the facts to determine whether there is a dual purpose to the expenditure.
In HMRC v Tim Healy (2013) UKUT 337 (TCC), Mr Healy was a professional actor based in Cheshire who secured a part in a musical based in London. He rented a three-bedroom flat that was one mile from the theatre that he stayed in while performing as it was too far to travel back to his home in Cheshire after each performance, although he returned home at weekends. He chose a flat in preference to a hotel as it was a cheaper option and there were fewer security issues.
Mr Healy deducted the cost of the accommodation in calculating the profits of his profession and HMRC issued a closure notice amending the return to disallow this expenditure.
The First-tier Tribunal (FTT) accepted that Mr Healy was required to work in different locations at different times and that there was no element of long-term stability in his work. They did not agree that Mr Healy had changed his base to London and concluded that Mr Healy had to find accommodation near to where he was performing and that therefore the expenditure was incurred wholly and exclusively in connection with his profession as an actor. HMRC appealed against the decision on the basis that the FTT had failed to correctly apply the wholly and exclusively test properly with reference to dual purpose.
The Upper Tribunal (UT) identified several principles derived from existing case law, which can be found at paragraph 66 of the judgement. In summary:
- There would be nothing that specifically excludes accommodation from being deducted, and expenses that outside a business context simply meet ordinary needs, may have a solely business purpose.
- There must be a clear link to the business activities, but the fact that an item of expenditure may be necessary for an individual to conduct his trade does not mean that it passes the “wholly and exclusively” test.
- Dual purpose expenditure would be disallowed; however, if the personal benefits of the flat providing warmth, shelter and comfort were merely incidental to the purpose, then the expenses would not be disallowed.
The UT agreed that there had been an error in law and remitted the case back to the FTT for a fresh hearing. Paragraph 69 of the judgement reads:
The correct approach to the ‘wholly and exclusively’ test, as demonstrated by the authorities, is to consider it by reference to the dual purpose test. In this case this required the FTT to ascertain whether there was a dual purpose on Mr Healyʼs part in entering into the tenancy agreement for the flat in London for the duration of the Billy Elliot production. In that context, 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. In order to determine that issue it needed to consider whether the effect of his taking the flat, namely of providing him with the warmth, shelter and comfort that we all need was merely incidental to that purpose or was a shared purpose. If the former were the case the expenditure would have been deductible, if the latter there was a dual purpose, and the expenditure would not be deductible.
On remission, the FTT disallowed the expense, finding a dual purpose of enabling the Appellant to perform his acting duties and enabling him to receive visitors in London. The FTT did not see the length of the tenancy agreement as relevant and rejected the suggestion that an apportionment could be made. The fact that the three-bedroom flat cost no more than a hotel was not material to this conclusion.
The cases referred in the principles set out by the UT were:
- Bentleys, Stokes & Lowless v Beeson (HM Inspector of Taxes) 33 TC 491 (BIM37400)
- Mallalieu v Drummond (H M Inspector of Taxes) (1983) 55 TC 330 (BIM37910)
- Elwood (H M Inspector of Taxes) v Utitz (1965) 42 TC 482 (EIM31664)
- Caillebotte (HM Inspector of Taxes) v Quinn (1975) 50 TC 222 (BIM37660)
- MacKinlay (HM Inspector of Taxes) v Arthur Young McClelland Moores & Co (1989) 62 TC 704 (BIM38120)
- Newsom v Robertson (HM Inspector of Taxes) (1952) 33 TC 452 (BIM37935)
- Mason v Tyson (H M Inspector of Taxes) (1980) 53 TC 333 (BIM37928)
- Prior (Inspector of Taxes) v Saunders (1993) 66 TC 210 (BIM37665)
- McClaren v Mumford (Inspector of Taxes) (1996) 69 TC 173 (BIM37930)
- Sean Reed v HMRC [2011] UKFTT 92 (TC)).
- Hanlin v HMRC [2011] UKFTT 213 (TC))