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Wholly and exclusively: expenditure having an intrinsic duality of purpose: living accommodation

S34 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)

Living ‘over the shop’

The cost of domestic living accommodation is not allowable notwithstanding that the expenditure allows the taxpayer to do more work.

In the case of Mason v Tyson [1980] 53 TC 333, a chartered surveyor carried on practice in Hackney but lived in Kensington. The small flat over his business premises became vacant. Mr Mason had it repaired, redecorated and furnished and subsequently used it from time to time to sleep in when he had to stay late at work. Mr Mason never worked in the flat.

The General Commissioners held that the Inspector had rightly refused a deduction for expenditure:

  1. on repairs and redecorations, since it was not wholly and exclusively incurred for the purpose of the profession and was expenditure for domestic and private purposes (what is now S34(1)(a) ITTOIA 2005), and
  2. on furniture because the expenditure was not incurred for the purposes of a qualifying activity and so did not qualify for capital allowances (under what is now Capital Allowances Act 2001)

In the High Court, Mr Mason sought to add to and ‘correct’ the facts (as he saw them) which had been found by the Commissioners.

The High Court dismissed Mr Mason’s appeal, holding:

  1. that the Commissioners’ decision in relation to both heads of expenditure was correct, and
  2. that the Court was bound to accept the facts found by the Commissioners and there was no jurisdiction to add to or to alter those facts.

Walton J said:

`I fully accept that the expenditure was a modest expenditure and I fully accept that the whole of the expenditure was incurred for the purpose of furnishing the flat so that Mr Mason could do more work than he otherwise could have done and could arrive at his morning’s work having had a good and proper night’s sleep. But, having said all that, it appears to me really beyond argument that the contents of the flat were not in any way used for the purposes of the trade. What they were used for was to provide a very sensible environment for Mr Mason with advantages to the practice in the way of extra work which he was enabled to do because of, putting it colloquially, the advantages he had in “living above the shop” whenever he wanted to take that course. But it does not seem to me that the mere fact that that is the result of the expenditure entitles him to say that the contents of the flat were used in the carrying on of the business….

There is a recent decision of my brother, Fox J., in Hampton v Fortes Autogrill Ltd [53TC691] and I think I need read only from the headnote, which is perfectly accurate:

“In determining whether something was ‘plant’, the functional test must be applied - i.e. did the item in question perform a function in the actual carrying on of the trade?”

Therefore, the question here is, for example: Did the bed in the flat perform a function in the actual carrying on of the trade? If one poses the question in that form - and that is the right form in which to pose it - it appears to me beyond all argument that it did not. What it did was to provide refreshment and rest for Mr. Mason, which enabled Mr. Mason thereby to carry on the business of Bunch & Duke, his business of chartered surveyors. But that the bed itself, or indeed any of the contents of the flat, was actually used as part of the profit-making apparatus of the practice of Bunch & Duke appears to me to be really wholly unarguable. Therefore, not only am I wholly unable, even had I wished, to depart from the conclusion of the General Commissioners on this point; it appears to me that if they had found in Mr. Mason’s favour I would have been obliged, on their primary findings of fact, to have come to a different conclusion. There really is, and can be, no argument about the nature of the flat. Similarly, when one comes to the question of the decoration of the flat, I think this is governed once again by the acceptance by the General Commissioners of the submissions of the Inspector of Taxes, to which I have already referred. What may not be deducted from the profits or gains is ‘any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of’, in this case, the profession. It seems to me quite clear that the money spent on redecorating the flat was not laid out for the purposes of the profession. It was laid out in order to have a suitable place where Mr. Mason could spend his evenings on those occasions when he wished to ‘live above the shop’.

Of course, in one sense - and a very important sense indeed - without that Mr. Mason could not have done so much work, or could not have done it so brilliantly, and therefore the practice would have suffered. But I do not think that anything which is laid out merely for the purpose of preserving the person who is carrying on the trade or business in health, strength and refreshment, to enable him so to carry it on, can properly be said to be ‘wholly and exclusively laid out or expended for the purposes of the … profession’. It must in part, of necessity, be laid out and expended on ordinary human physical needs. The Scots have a useful expression, ‘The body maun be keep it up’. Of course the body must be kept up and in order to keep up the body one must eat and, within modest limits, at any rate, drink - and hopefully also be merry. But the mere fact that that is what one has to do, and that if one did not do that one would rapidly fall into a state of decline and therefore be totally unable to carry on one’s profession, does not mean that when one has a jolly good meal finished off with a bottle of claret the money so expended is being laid out wholly and exclusively for the purpose of one’s profession; it is not. It may in a sense be partially so laid out, but not wholly or exclusively. In the present case it seems to me that the matter is clearly analogous to that.

Mr. Mason had to have somewhere to sleep. He could very well have slept at his Kensington home. That, of course, would have entailed that he would not have had so much time to give to the practice. But when he was sleeping in his flat above the practice he was having a good night’s sleep, which was essential to him whether, the following day, he was going to work or play, or do a bit of the one and a bit of the other. That being so, it seems to me that it is quite impossible to say that any money expended on redecorating or running the flat was ‘wholly and exclusively laid out or expended for the purposes of the … profession’. Those are the words to be found in [what is now S34(1)(a) ITTOIA 2005] and there are many cases in the books which lay it down that those words mean exactly what they say. Part of the expenditure must have been, inevitably, merely providing Mr. Mason with the needed night’s rest.’

The expenditure was therefore not allowable.