First-tier Tribunal (Tax)

[2011] UKFTT 18 (TC)

TC00895

Appeal number: TC/2009/10238

Income Tax- profits of a business-deductibility of expenses of counselling- whether incurred exclusively for the purposes of the business

FIRST-TIER TRIBUNAL

TAX

PARVEEN AZAM Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: CHARLES HELLIER (TRIBUNAL JUDGE) NIGEL COLLARD

Sitting in public in Brighton on 14 November 2010

Peter Clarke of Clarke & Co  for the Appellant

Lynne Ratnett for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.       Mrs Azam appeals against an amendment to her self assessment return for 2002/03 by which her trading profits were increased by the adding back of £30,995. This sum represented the costs incurred principally on training or counselling sessions.

2.       HMRC said that these expenses were not incurred exclusively for the purposes of her trade, and were therefore not deductible.

The Law

3.       Section 74 ICTA 1988 provides that

“…in computing the amount of profits to be charged...no sum shall be deducted in respect of –

(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade or profession…”

4.       Because of the requirement that, for an expense to be deductible, it must be incurred “exclusively” for the purposes of the trade,  if an expense was incurred for two purposes, one of which was not a trading purposes, it is not deductible.

5.       We were referred to a number of cases, the most recent of which, Vodafone Cellular Ltd and others v Shaw (Inspector of Taxes)  1997 STC 734, contains a helpful summary in the judgment of Millet LJ of the effect of the word “exclusively” in section 74:

“The leading modern cases on the application of the exclusivity test are Mallalieu v Drummond…and MacKinley (Inspector of Taxes) v Arthur Young McClelland Moores& Co… From these cases the following propositions may be derived.

“(1) The words for the purposes of the trade mean to serve the purposes of the trade. They do not mean for the purposes of the taxpayer but for the purposes of the trade, which is a different concept. A fortiori they do not mean for the benefit of the taxpayer.

“(2) To ascertain whether the payment was made for the purposes of the taxpayer’s trade it is necessary to discover his object in making the payment. Save in obvious cases which speak for themselves, this involves an inquiry into the taxpayer’s subjective intentions at the time of payment.

“(3) The object of the taxpayer in making the payment must be distinguished from the effect of the payment. A payment may be made exclusively for the purposes of the trade even if it also secures a private benefit. This will be the case  if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

“(4) Although the taxpayer’s subjective intentions are determinative, these are not limited to the conscious motives which were in his mind at the time of the payment. Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.

“To these propositions I would add one more, The question does not involve an inquiry of the taxpayer whether he consciously intended to obtain a trade or personal advantage by the payment, The primary inquiry is to ascertain what was the particular object of the taxpayer in making the payment,. Once that is ascertained, its characterisation as trade or private purpose is in my opinion a matter for the [tribunal] not the taxpayer.”

6.       We note in particular the last proposition. Its effect is that we should not be interested in evidence about whether the taxpayer did or did not think that the payment was for the purposes of the trade: instead we should be interested in what the taxpayer intended the expenditure for. Thus we would ask: for what purpose did the potato merchant buy a ton of potatoes?  If the evidence shows that his purpose was to sell them rather than to eat them, then we can conclude as a second step that such purpose was for the purposes of his trade rather than for the private purpose which would have arisen if he had bought them to eat. This was particularly relevant in our assessment of Mrs Azam’s evidence, some of which focussed on whether she had incurred the expense for the purposes of her trade, rather then the particular purpose of the expense.

The Facts

7.       We had copy correspondence before us and heard the oral evidence of Mrs Azam. Our impression of Mrs Azam was that she was a truthful witness who was well aware of the principle that these expenses would be deductible only if incurred for a trade purpose. We thought that in her early answers her concentration on that principle made her somewhat hesitant and her answers less fulsome than they otherwise might have been.

8.       In 2002/03 and for three or four years before that Mrs Azam ran a beauty salon in Newcastle. She had four treatment rooms and employed two full time staff and three or four part time staff. In other years she had up to seven staff. Most of the staff were 18 to 20 year old girls.

9.       She worked hard in running the business: almost all day for six or seven days a week. She came from a Muslim family where wealth was normally passed on only to male heirs. She wanted to have something of her own. She created this business by herself. It was important to her to succeed, and to be able to show her family that she was successful.  She was successful by reason, in no small measure, of her hard work and business acumen.

10.    Mrs Azam found she had difficulty dealing with issues such as those where she needed to confront her staff. She found help in dealing with these issues in counselling sessions she attended with Calcioli Field Practice of East Grinstead in West Sussex. (We were not told whether Mrs Azam travelled to East Grinstead for these sessions but the address on Calcioli’s invoice was East Grinstead.)

11.    At these sessions Mrs Azam told us that she would sit across a table or desk from a counsellor and explain the issues with which she was having difficulty. There would be a discussion of whether she had had similar difficulties in the past and the reasons for the problem. The counsellor would help her to find her own solutions to the problems.  Each session would last between two and four hours.

12.    The invoices and Mrs Azam’s evidence indicated that she had had some 45 counselling sessions in 2002/03. Mrs Azam told us that these did not take place at regular intervals but in batches. There would be three or four sessions on consecutive days and then a gap. She told us that an issue would arise at work, she would then seek counselling about it, and after the counselling return to work to deal with the problem.

13.    Mrs Azam had studied Scientology for some time and had found it very helpful in her everyday life. Mrs Azam told us that Calcioli provided counselling on the principles of the Church of Scientology, that Calcioli had a licence from the Church of Scientology to deliver counselling using its principles in particular areas, and that it applied the principles set out by L Ron Hubbard in counselling her.

14.    Mrs Azam told us that L Ron Hubbard had devised a number of tools to help people in specific areas. These principles were promulgated by the Church of Scientology. She did not regard Scientology as a religion, but instead as a philosophy of how to lead a better life. Mrs Ratnett took us to a print from the Church of Scientology’s web site. This described Scientology as “More than a system of belief. Scientology is an applied religion that plays a vital role in the lives of its congregation and the community at large.” On the same website it also said “In scientology no-one is asked to accept anything as a belief or faith”. We did not have the evidence on which to make a judgement about the nature of the ideas of Scientology, nor was it necessary for us to do so. We accept that Mrs Azam did not regard it as a religion, and accept too that its tenets include ideas for bettering the followers’ lives.

15.    It was clear to us that Mrs Azam considered that the principles advocated by Scientology worked, that she supported them, and that she believed that benefits could be derived from them.

16.    Mrs Azam accepted that she had derived personal benefits from the sessions. They had given her more confidence in everyday life. She applied the principles she had used in her business and derived from the sessions in dealing with people outside business life. She found it easier to stand her ground, she was more stable in her thinking, and was less likely to be diminished by others.

17.    We could understand why Mrs Azam sought these benefits in dealing with other people.  She had moved out of the family home. Dealing with the running of a business required an ability to confront other people.

18.    Mrs Azam had also been to counselling sessions in the earlier years of her business activity. thus in 2002/03 she knew what benefits she would receive as a result of them.

Our assessment

19.    We consider that Mrs Azam did attend the counselling sessions in order to help herself deal with personnel issues in her business. But we also consider: that by 2002/03 she knew that she obtained benefits from the sessions which she felt enhanced her normal life, and that she sought  this type of counselling  knowing that it provided help in her everyday dealings and in how she felt about herself and because she was attached to the Scientology philosophy and found benefit from it.

20.    It seems likely to us that by 2002/03, when Mrs Azam paid for the counselling sessions she had in mind, at least subconsciously, the personal benefits she derived. In our view those benefits were inevitably and inextricably linked to attending the sessions and, by 2002/03, could not be called purely incidental.

21.    We therefore conclude that Mrs Azam had two purposes in mind when she attended these sessions. One was to help her deal effectively with difficulties which arose in her business. That was thus for the purposes of her trade. The other was to enhance her own wellbeing. That was a private purpose.

22.    Accordingly these expenses were not incurred exclusively for the purposes of Mrs Azam’s business, and were not deductible from its profits.

23.    Mr Clarke urged on us the conclusion reached by the Court of Appeal in Bentley Stokes and Lowless v Beeson  1952 2 All ER 82. We should explain why we reach a different conclusion. In that case a firm of solicitors were permitted to deduct the expenses of lunching their clients. That expense included their own meals. The Court of Appeal accepted that the expense was “really a single transaction in which the partner’s lunch is an essential ingredient”, in other words that the private purpose was incidental to the business purpose.  Later in the same judgement the Court said “Per contra if, in truth, the sole object is business promotion, the expenditure is not disqualified because the nature of the activity necessarily involves some other result…since the latter result is necessarily inherent in the act.”. We accept that, and we accept that merely because the personal benefit to Mrs Azam necessarily flowed from the attendance on the course, it does not mean that the expense had a dual purpose. We agree with Mr Clarke that the issue is the purpose of the expenditure, not the result of it. But we say, because of the long history of attending these sessions, because the private benefit was known and expected, and because of Mrs Azam’s attachment to the principles used, that, at the very least unconsciously, she had a purpose of obtaining that private benefit as well: the premise of the quoted statement is not satisfied: in truth the sole purpose was not business promotion.

24.    We therefore dismiss the appeal

Rights of Appeal.

25.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

CHARLES HELLIER

TRIBUNAL JUDGE

RELEASE DATE: 20 DECEMBER 2010