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Business Income Manual

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

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

Residential accommodation in a public house

As explained in BIM37928, the cost of domestic accommodation is not allowable. This remains the case notwithstanding that the taxpayer’s only conscious motive in occupying the property is to carry on their trade, profession or vocation.

In the case of McLaren v Mumford [1996] 69 TC 173, Mr McLaren was a tenant of a public house. Mr McLaren’s only conscious motive in entering into the tenancy agreement was to provide himself with a trade to earn his living. The premises included living accommodation, and the tenancy agreement required him to live at the premises at all times, which he did. Mr McLaren and his partner lived in the premises, and her sons made occasional visits, but he also owned and maintained a house elsewhere.

Mr McLaren sought a deduction from his profits as a publican for the full amount he incurred on rent, rates, lighting, heating and insurance. The General Commissioners held that, whilst Mr McLaren’s only conscious motive at the outset had been to provide himself with a trade, the purpose of the expenditure was also to provide him with personal residential accommodation. They disallowed one-sixth of the expenditure to cover the private and personal use of the premises. Mr McLaren appealed.

The High Court dismissed Mr McLaren’s appeal. The Court held that it was irrelevant that Mr McLaren’s only conscious motive in signing the tenancy agreement was to provide himself with a trade to earn his living. The expenditure was incurred in consequence of the signing of the tenancy agreement. The private element of the expenditure was not incurred for the purpose of earning the receipts of Mr McLaren’s trade, but served the non-trade purpose of satisfying his ordinary human needs. On the facts found, the Commissioners were entitled to have come to the conclusion that they reached.

Rimer J referred to Mason v Tyson [1980] 53 TC 333 (see BIM37928) and Mallalieu v Drummond [1983] 57 TC 330 (see BIM37910) and explained that it is irrelevant that the taxpayer’s only conscious motive in signing the tenancy agreement was to provide himself with a trade to earn his living or that it was incurred in consequence of the signing of the tenancy agreement. The private element of the expenditure was not incurred for the purpose of earning the receipts of the taxpayer’s business, but served the non-business purpose of satisfying the taxpayer’s ordinary human needs. It was thereby disqualified from being deducted, and that was so regardless of the taxpayer’s motive when he signed the agreement or of the fact that the tenancy agreement obliged him to occupy the premises.

The part of Rimer J’s judgment where he explained why the expenditure was not allowable is set out on pages 184-186:

`For the Crown, Mr Brennan submitted that the expenditure in this case served a dual purpose, both private and business, and that although only [what is now S34(2) ITTOIA 2005] refers expressly to apportionment of expenditure (in relation to rent) it has long been the practice of the Revenue to accept that, in circumstances such as the present, an apportionment such as that directed by the Commissioners can properly be made. He referred to Wildbore v Luker [[1951] 33 TC 46, at page 51 see BIM37600], for a recognition by Roxburgh J of the Revenue’s practice in this respect. The Crown does not contend in this case, any more than it did in that one, that if some part of the expenditure must be disallowed as being incurred for private purposes the whole must be disallowed.

As to whether the expenditure in this case was in fact for a dual purpose, Mr Brennan submitted that it is irrelevant that the taxpayer’s only conscious motive in signing the tenancy agreement was to provide himself with a trade to earn his living or that it was incurred in consequence of the signing of the tenancy agreement. The private element of his expenditure was not incurred for the purpose of earning the receipts of the taxpayer’s business, but served the non-business purpose of satisfying his ordinary human needs. It was thereby disqualified from being deducted, and that was so regardless of the taxpayer’s motive when he signed the agreement or of the fact that the tenancy agreement obliged him to occupy the premises…

…I accept Mr. Brennan’s submissions and I agree that, on the facts which they found, the Commissioners were so entitled. I dismiss the taxpayer’s appeal.

I add that in his reply Mr. Grierson submitted that the Revenue’s practice of allowing the apportionment of dual purpose expenditure of the type incurred in this case was wrong in law. It was unclear to me how that submission was thought to assist the taxpayer. On the facts found by the Commissioners it would, if correct, appear to invite the conclusion that none of his expenditure, including the part incurred for business purposes, was deductible in the computation of his profits for tax purposes. However, as the point is not raised by the Case Stated, I do not propose to express any view on it.’