First-tier Tribunal (Tax)

[2011] UKFTT 91 (TC)

TC00968

Appeal numberTC/2010/011713

INCOME TAX – Deduction against profits - travelling expenses and subsistence –self-employed commercial pipe fitter – trips to various sites for different companies – home business base – discovery enquiry in time- appeal allowed in part.

FIRST-TIER TRIBUNAL

TAX

ALAN KENYON Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: DAVID S PORTER (Judge)

DEREK ROBERTSON (Member)

Sitting in public at the Cunard Building, Liverpool on 18 January 2011

The Appellant in person

Mr Brian Morgan, an Inspector of Taxes, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       The Appellant (Mr Kenyon) appeals against the Respondents’ refusal to allow his travelling and subsistence expenses for the years 2004/5, 2005/6 and 2006/7 in the sums of £8,836, £6,882 and £11,987 contained in a review letter dated 9 December 2009. Mr Kenyon says that he works from home and since he travels to various sites from his home he ought to be allowed the deductions. HMRC say that he predominately worked with Brewchem International Limited (Brewchem) for the 3 years under review. As Brewchem represented his principal place of work he could not deduct the costs of his travel and subsistence when travelling from his home on the Wirral to London and back again. His returns had been filled in negligently and the discovery enquiry was in time.

2.       Mr Brian Morgan (Mr Morgan) appeared for HMRC and provided us with two Bundles of documents. He also referred us to the following cases:

·       Newsom v Robertson (Inspector of Taxes) [1952] 2 All ER 728

·       Caillebotte (Inspector of Taxes) v Quinn [1975] 2 All ER 412

·       Prior (H M Inspector of Taxes) v Saunders 66 TC 210

Mr Kenyon appeared in person

The facts

3.       Mr Kenyon told us that during the period under review he was a self-employed pipe fitter. He fits and repairs piping for the petro-chemical and brewing industries. He explained that the back ground to his pattern of working starting in 2003. In that year he worked for Exxon in Southampton for four weeks until the work was discontinued. He stayed in Southampton having travelled from his home at Bebington on the Wirral in Cheshire. He has a list of contacts, which he rings when he is looking for additional. He was advised that there was work at an oil refinery in Pembrokeshire and having returned home he travelled there and worked for 1 week. Whilst he was there a friend telephoned to tell him that there was work at Brewchem, in London, to start on the Monday at Mortlake at the Stag Brewery. He had returned home, but he could not start work on the Monday as his car had broken down and he eventually to London on the Wednesday. He was Brewchem for 2 weeks then he decided to work at Steeton in West Yorkshire. He returned home on his way to the new job at Steeton. He was at Streeton for 2 weeks and, after returning home, he then went to Tate and Lyle in London for 2 weeks before he went on holiday. When he returned from holiday there was no work available, so he contacted Brewchem in Greenwich to see if they could employ him, which they did. However, he became ill and had a heart-bye pass. He was off work from October 2004 to September 2005. In February 2006 he retruned to Brewchem.He had been asked to carry out some work on screw gear. He had to lean over the gear to carry out the work and it hurt his scar on his chest from the heart surgery. He was unhappy with the job and told the manager so. At the same time, he was contacted by PSN (a company working the oil rigs in Scotland) to ask if he could work off-shore in Aberdeen. He left Brewchem and went on a 3 day training course for PSN. He had to take a medical and because of his heart condition was unable to complete the “treadmill test”. He therefore went back to Brewchem for 3 months. He was able to take the “treadmill test” at home through his own Doctor, which he passed.  The work on the oil rigs takes place between April and September, when the weather is reasonably settled. He was too late to take up the work that year and returned to work for Brewchem in February 2006. We note that he always returned to his home after each job finished and before he took on a new assignment.

4.       Mr Kenyon told us that his wife works part-time and is paid £50 per week. He receives invalidity benefit of £57 per week and a further £100 per week from an insurance policy he had taken out. His two daughters are at home and they are unable to make a contribution to the family budget so that he has to continue to work. He is now employed full time by Brewchem and is in receipt of petrol and subsistence which is not treated as a benefit in kind as it partially covers his expenditure.

5.       HMRC opened an enquiry into the 2006-7 and 2007-8 returns under section 9A of the Taxes Management Act 1970 on 26 January 2009. The return for 2006-7 was submitted on 22 September 2007 and the 2007-8 return was submitted on 4 January 2009. Both enquiries were opened within the time limits allowed by section 9A taxes management Act 1970. As a result of these enquiries HMRC were of the opinion that Mr Kenyon worked in the Greenwich area almost continuously between 2004-5 and 2006-7. On the same time a discovery enquiry was opened into the 2005-6 return under the provisions of section 29 Taxes Management Act 1970 (.referred to below). The three self-assessment returns filed by Mr Kenyon revealed at box 3.56 the figure claimed for travel and subsistence. The figure represented about 25% of his turnover and we consider that HMRC should have been put on enquiry as to why it was so high. In his return for 4/2006 to 05/05/2007 Mr Kenyon inserted at box 3.47 that he had expended £2000 on expenses for the construction industry. He said this was a typing error and should have read £200. We found his evidence to be genuine and we have no reason to suppose that he was other than truthful. At box 3.51, against employment costs he had inserted £1500. He told us that he had had an the employee who had since died. He refused to give us the employees name. These costs had been added back. As a result of the enquiry his turnover had also been increased and the CIS deductions had been reduced. He has prepared the account himself and the figures he has included for the CIS returns do not tie in with the figures provided by his main contractors. In the return for 2008 the discrepancies were £1,656, for his turnover, and £268.71 for his deductions. His turnover declared for that year was £41843. In the return for 2007 the figures were £7,337 and £1,319.08 respectively on a turnover of £38,011 Given the complexity of the CIS returns, we consider that he has completed his 2007 carelessly, but not negligently. The error of £7,337 in his 2008 return represents almost 20% of his turnover. We cannot accept that this amount was careless and consider that he was negligent in completing the return. He must have been aware that the turnover figure was too low. He had, after all, made £41,843 in the previous year.

The Law

6.       Section 74 of the Income and Corporation Taxes Act 1988 Part IV provides:

74 General rules as to deductions not allowable

(1) Subject to the provisions of [the Corporation Tax Acts], in computing the amount of the profits to be charged [to corporation tax] under Case 1 or Case 11 of schedule D, no sum shall be deducted in respect of –

(a) a disbursement or expense, not being money wholly and exclusively laid out or expended for the purposes of the trade [or profession]….

Section 34 of Income Tax (Trading and Other income) Act 2005 came into force on 6 April 2005 for the purposes of income tax for the year 2005-6 and subsequent tax years and is effectively the same as section 74 above.

Section 29 of the Taxes Management Act 1970 provides at:-

29 (1) if an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment –

(a) that any income which ought to have ben assessed to income tax, or chargeable gains which ought to have been assessed to capital gains tax, have not been assessed, or

(b)  that any assessment to tax is or has become insufficient, or

(c)  that any relief which has been given is or has become excessive,

The officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought  in his or their opinion to be charged in order to make good to the Crown the loss of tax.

29 (3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under section (1) above –

(a)  in respect of the year of assessment mentioned in that subsection; and

(b) …in the same capacity as that in which he made and delivered the return,

Unless one of the two conditions mentioned below are fulfilled.

(4)    The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of [was brought about carelessly or deliberately by] the taxpayer or a person acting on his behalf.

(5)    The second condition is that at the time  when the officer of the Board-

a.      ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment; or

b.     informed the taxpayer that he had completed his enquiry into the return,

the officer could not reasonably be expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above

(6)    For the purposes of subsection (5) above, information is made available to an officer of the Board if-

(a)        it is contained in the taxpayer’s return under sections 8 or 8A of this Act in respect of the relevant year of assessment (the return), or in any accounts, statements or documents accompanying the return;

(b)        it is contained in any claim made as regards the relevant year of assessment by the taxpayer acting in the same capacity as that in which he made the return, or in any accounts, statements or documents accompanying the same.

(c)        it is contained in any documents, accounts or particulars which, for the purposes of any enquiries into the return on any such claim by an officer of the Board, are produced or furnished by the taxpayer to the officer or…;

(d)        it is information the existence of which, and the relevance of which as regards the situation mentioned in subsection 91) above –

(i)          could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c ) above; or

(ii)        are referred to in writing  by the taxpayer to an officer of the Board

(7)    In respect of subsection (6) above-

(a) reference to a taxpayer’s return under section 8 and section 8A of this Act in respect of the relevant year of assessment includes-

(i) a reference to any return of his under that section to either of the two immediately preceding years of assessment; and

(ii)….

(b)……………..

[Note: “ careless and deliberate “ in subsection29 (4)  are contained in the Finance Act 2008 and came into force on 1 April 2010, which is after the dates of the enquiries in this appeal.]

Summing up

7.       Mr Morgan submitted that the expenses are not allowable as they are the costs of “ordinary commuting” and not incurred in the performance of the Trade. The essence of the rule set out at Section 34 above is that in calculating the profit of a trade expenditure it may only be allowed as a deduction if it is incurred wholly and exclusively for the purposes of the trade. If the expenditure fulfils another non-business purpose, then the expenditure cannot be permitted as a deduction from business profits. In Newsom v Robertson (Inspector of Taxes) [1952] 2 All ER 728 Mr Newsome was a barrister and his chambers were located in London. At his home, situated outside London, he used a study for the purposes of doing work, which he took home at evenings and weekends. During the vacation, he seldom travelled to London, but did the greater part of his work at home. In a unanimous decision, the Court of Appeal decided that the cost of travel between Mr Newsom’s home and his chambers could not be permitted, and consequently Mr Newsom’s appeal was dismissed because one of the purposes of Mr Newsom’s journey was that it enabled him to live away from his place of work.

8.       HMRC would argue that Mr Kenyon’s base of operations is, in effect, Greenwich as this is where he carried out his work. HMRC contend that in travelling from his home to Greenwich (and back), and from lodgings to Greenwich (and back) he is merely commuting to work and that the activity of the trade does not start until he arrives at the site. Accordingly, the costs are not incurred exclusively for the purposes of the trade. The cost of food, drink and accommodation is not, in general, an expense incurred wholly and exclusively for business purposes. In the case of Caillebotte (Inspector of Taxes) v Quinn [1975] 2 All ER 412 Templeman J commented ‘A schedule D taxpayer, like every other taxpayer, must eat in order to live; he does not eat in order to work’. In the case of Prior (H M Inspector of Taxes) v Saunders 66 TC 210 the subcontractor again worked in London, claiming subsistence costs and citing a home address in the Bournemouth area. Judge Sir Mervyn Davies, in the High Court, overturned a previous General Commissioners decision in relation to subsistence costs, on the basis that the payments amounted to rent and were not therefore exclusively for the appellant’s trade.

9.        Having concluded that the 2006-7 return is incorrect HMRC have issued Discovery Assessments for 2004-5 and 2005-6 to bring into charge expenditure that is not due. To make a “Discovery” one of two conditions have to be satisfied:-

(a)        The further tax that is due must arise from fraudulent or negligent conduct of the taxpayer, or a person acting on his part, or

(b)        HMRC could not have been reasonably expected, on the basis of the information available to them to be aware of the underassessment when the enquiry window is closed.

HMRC submit that both conditions apply. MR Kenyon was negligent in completing his 2006-7 return as evidenced by agreed adjustments which were made to an excess claim on replacement tools and excess employee’s costs. HMRC contend that negligence is evident by claiming ordinary commuting costs as a business expense. HMRC also submit that at the time the enquiry window closed for 2004-5 and 2005-6 that it was apparent from the return entries that the expenses claimed were excessive and that there was a potential loss of tax, consequently, the appeal should be dismissed.

The decision

10.    We have considered the facts and the law and we allow the appeal subject to the disallowance of the claim for accommodation expenses.. These cases are invariable fact sensitive. Mr Kenyon gave a very useful background to the way that he works. He was not specific as to the dates, but it is clear that he was working as a self-employed pipe fitter. During the period from 2003 to 2007 he had worked at various sites many of them not related to Brewchem. He had a network of business and colleagues, who advise him of the availability of work. His timetable of work seems to vary from a few weeks to considerably longer. There is no doubt that his home is his work base. It is from there that he organises new work and it is there that he is contacted from time to time for work in addition to the times he is contacted whilst working away from home. In those circumstances it is difficult to see how Brewchem could be his principal place of work. It is true that he has worked for Brewchem longer than for any other company. There appear to have been breaks away from Brechem either due to his illness or his seeking work for short periods elsewhere. We accept that there must come a time when a trader’s principal place of work is where he spends most of his time. If Mr Kenyon had only worked for Brewchem during this period, and not sort work elsewhere from time to time, there would be considerable merit in Mr Morgan’s submissions. Mr Kenyon’s circumstances are not the same as Mr Newsom’s the barrister. Mr Newsom, as a barrister worked from his chambers. Mr Caillebotte could not claim his lunch bills as he had to have lunch in any situation and the payments were not therefore wholly and exclusively for his business purposes. In contrast Mr Kenyon is merely claiming his travelling costs and accommodation costs. As we have decided that he was based at home and travelled round the country working, we have decided his travelling expenses should be allowed, as these were incurred wholly and exclusively to get him to his place of work. As to the accommodation, Sir Mervyn Davies, in Prior (H M Inspector of Taxes) v Saunders 66 TC 210 , said:

“that such deductions were not rightly allowed…. The Commissioners allowed a use of home deduction in the sum of £63 for the period 1 December 1987 to 20 February 1989. That deductible item was, as were all other deductible items, said to be deductible under the provisions of section 74. I do not see how a use of home deduction can be related to section 74. Furthermore, the evidence does not show that a use of home deduction can be justified on any other ground”.

The expense must be “wholly and exclusively” for the purposes of the trade. The Bed and breakfasts were necessary for somewhere for Mr Kenyon to sleep and were not therefore “wholly and exclusively” for the trade.

11. The enquiries into the years 2006-7 and 2007-8 were made in time. The Discovery Enquiry would be out of time, if the terms of subsection 29 (3) apply. We consider that HMRC should have been put on notice that the claims for the travelling expenses in the returns were out of all proportion to the general expenses expected in this type of trade. As a result subsection 29 (3) would apply. However, although we have concluded that Mr Kenyon was careless in completing his return for 2007, we do consider that he was negligent in relation to his return for 2008. In those circumstances HMRC are entitled to raise a discovery assessment out of time under the first condition in section 29 (4). As we have allowed the appeal in relation to the travelling expenses, the assessments need to be amended by re-instating those expenses in the appropriate years. 

12. 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.

TRIBUNAL JUDGE

RELEASE DATE: 28 January 2011