First-tier Tribunal (Tax)

Tax year Accounts y.e. Expenses in dispute

2003-04 31. 8.03 £48,752

2004-05 31. 8.04 £55,929

2005-06 31. 8.05 £163,991

(i) relevant legislation S74 ICTA 1988 (as amended), S34 ITTOIA 2005 and the Goods Vehicles (Licencing of Operators) Act 1995 and associated regulations  (ii) case law authorities (iii) documentation relating to Mr Duckmanton’s appeal to the Court of the Transport Tribunal regarding revocation of his operators licence (iv) copy exchange of correspondence between the parties (v) the assessments and closure notices

The background facts

Legislation

17.  The relevant law for the years in question is ICTA 1988 s74 for 2002-03 to 2004-05 and ITTOIA 2005 s34 for 2005-06

ICTA

‘74 General rules as to deductions not allowable

[(1)]¹  Subject to the provisions of the Tax Acts, in computing the amount of the [profits]⁷ to be charged under Case I or Case II of Schedule D, 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, profession or vocation;

(b)        any disbursements or expenses of maintenance of the parties, their families or establishments, or any sums expended for any other domestic or private purposes distinct from the purposes of the trade, profession or vocation’;

Amendments –

¹ “(1)” inserted by virtue of FA 1994 s 144(2).

⁷  Word substituted in sub-s(1) and (1)(m) by FA 1998 Sch 7 para 1 with effect from 31 July 1998.

ITTOIA

‘34 Expenses not wholly and exclusively for trade and unconnected losses

(1)            In calculating the profits of a trade, no deduction is allowed for –

(a) expenses not incurred wholly and exclusively for the purposes of the trade, or

(b) losses not connected with or arising out of the trade.

(2)            If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade’.

Evidence

18.  The parties agreed that there was no dispute as to the background facts. The issue before the Tribunal, was whether the expenses incurred by Mr Duckmanton had been incurred wholly and exclusively for the purposes of his trade and were therefore allowable for tax purposes.

19.  Mr Duckmanton gave evidence under oath. He provided some historical background relating to his business and explained his purposes in incurring the legal and other professional fees. Evidence was also given under oath on his behalf by Ms Christabel Louise Hallass, a solicitor who was employed by the regulatory transport department of Messrs Ford & Warren solicitors who represented Mr Duckmanton in the criminal proceedings and also provided preliminary advice in connection with public enquiry proceedings before the Traffic Commissioner. Ms Hallass now advises clients on the Goods Vehicles (Licensing of Operators) Act 1995, and in particular its provisions in relation to public inquiries before the Traffic Commissioner. Both Mr Duckmanton and Ms Hallass were cross-examined on their evidence.

20.  Mr Duckmanton said that he started in the car transporter business in 1982.  The business grew and at the time of the accident he had 18 trailers and 20 employees.  He had been advised by his accountant to go ‘limited’ but did not wish to do that.  He could not explain his reasoning save to say that he regarded his business as family-run and wished to keep it that way.  The possible economic benefits of ‘going limited’ were not of particular importance to him.

21.  Mr Duckmanton said that the legal costs he incurred in fighting the Gross Negligence Manslaughter charge were huge but that he was determined to fight them because he regarded the charge as fundamentally ‘wrong’ and also because it portrayed him as a reckless individual without any regard for safety standards.  He said that he was never in any doubt that forensic evidence relating to his safety procedures would eventually vindicate his claim that there had been no widespread culture of falsification of records or other wanton disregard for safe working practices.

22.  Mr Duckmanton said that, at considerable cost, he employed leading and junior counsel to conduct his defence. He said that prior to the hearing he had to make an application to the court for the purpose of setting up a test rig to conduct tests on the vehicle involved in the accident (which had been impounded) to prove the ‘point of failure’ of its brakes in order to establish that, whether or not the brakes were out of adjustment, the primary cause of the accident was driver error.  He says the police resisted the application but eventually the tests were undertaken and the vehicle’s brake efficiencies were found to be a ‘pass’.

23.  Mr Duckmanton said that at the time of the trial, irrespective of the eventual outcome, preserving his business reputation and status as a person of good repute, in his capacity as a transport manager, and thereby hopefully preserving his operator’s licence, was or paramount importance. It was, he said, more important to him to establish that the accident had been caused by driver error and not because of a breach of safety standards, and thereby preserve his reputation, than it was to avoid the prospect of being sent to prison for a term of five years.

24.  Mr Duckmanton conceded that there was a possibility of a civil action against him because of the fatality and that had he been found guilty on the Manslaughter charge a substantial damages action against him could have ruined his business.  Again however, he said that this was of secondary importance to the preservation of his business reputation and transport manager’s operator’s licence which was his sole means of livelihood.

25.  In her evidence Ms Hallas said that under the provision of paragraph 1(1) of schedule 3 of the Goods Vehicles (Licensing of Operators) Act 1995 in determining whether or not Mr Duckmanton was of good repute, the Traffic Commissioner would have had to have regard to any relevant convictions and any other information in his possession which appeared to him to relate to the individual’s fitness to hold a licence. She confirmed that had Mr Duckmanton been found guilty of Gross Negligence Manslaughter then the Traffic Commissioner and the Court of the Transport Tribunal would have placed significant weight on his conviction, not only in determining whether or not Mr Duckmanton continued to be of good repute at the Public Enquiry, but also any future application for an operators licence. Ms Hallas said that had Mr Duckmanton not successfully defended the Gross Neligence Manslaughter proceedings and the allegation that there had been a widespread culture of falsification of maintenance records, he would not only have lost his operators licence but would have found it extremely difficult to regain his repute and with that an operators licence for any future business.

Submissions

26.  Both parties provided a statement of case and skeleton arguments. 

27.  The following case authorities were referred to in argument :

Spofforth and Prince v Golder [1945] 26 TC 310

Bowden v Russell & Russell [1965] 42 TC 301

Knight v Parry [1972] 48 TC 419

Vodafone Cellular Ltd & Others v Shaw [1995] 69 TC 376

McKnight v Sheppard [1999] 71 TC 419

28.  The main substantive issues which arose in argument can be summarised as follows :-

(a)  Was the expenditure incurred for the purposes of the trade?

29.  Mr Hall argues that, although the wording is different in the provisions of s74 ICTA and s 34 ITTOIA, the effect is the same. A deduction is only allowed if an expense is incurred or expended wholly and exclusively for the purposes of the trade. If an expense is incurred or expended for more than one purpose no deduction is allowed for private purposes as distinct from the purposes of the trade, subject to a deduction being allowed where an identifiable portion can be shown to be incurred wholly and exclusively for the purposes of the trade. He contends that the legal fees incurred by Mr Duckmanton were not wholly and exclusively expended for the purposes of the trade and that it had not been shown that there were any identifiable portion of those fees which had been specifically incurred for the purposes of the business. He says that the true purpose of the expenditure on legal fees was for Mr Duckmanton to defend himself against criminal charges and therefore to preserve his liberty and personal reputation.

30.  Converseley Mr Barnet argues that the not guilty plea to the Gross Negligence Manslaughter charges was for the purpose of protecting Mr Duckmanton’s operators licence. He says that the charges against Mr Duckmanton arose in the conduct of his business and not personal non-business conduct.  The charge of Gross Negligence Manslaughter was a strict liability offence which turned on whether there had been recklessness in failing to ensure a safe system of work and the technical issues which had to be addressed (including forensic reports and the setting up of a test rig to assess the effectiveness of the vehicle’s brakes), accounted for a significant part of the costs of the criminal trial. He argues that this serves to emphasise the point that the costs primarily related to a matter arising during the course of Mr Duckmanton’s business and specifically to safeguard his transport operators licence. That was achieved, albeit on an interim basis, as the licensing authority postponed the public enquiry proceedings against Mr Duckmanton until the Manslaughter case had been determined. Mr Duckmanton’s licence was eventually revoked but renewed upon re-application some time later.  There had therefore been a revocation of the operators licence for a minimum period. Mr Barnet contends that, although it was inevitable that Mr Duckmanton would lose his operators licence for a period, had he been found guilty of Manslaughter, it was improbable that he would have ever been able to reapply for a licence.  He therefore argues that the costs incurred were “for the purposes of the trade” and therefore an allowable deduction under s 74(1)(a) of ICTA 1988 and s.34 ITTOIA.

(b) Was there duality of purpose?

31. Both parties agreed that a distinction had to be drawn between ‘purpose’ and ‘effect’. The expenses had to be incurred wholly and exclusively for the purposes of the trade. It was also agreed that there could be duality of purpose, but only one primary purpose, which, for the expenditure to be allowed, had to be incurred for the purposes of the trade. Mr Hall argues that even if one of Mr Duckmanton’s  purposes in defending the Gross Negligence Manslaughter charge was to protect his business, there was nonetheless another distinct and primary purpose in that he wished to preserve his liberty and reputation as an individual and that accordingly the expenditure had not been wholly and exclusively incurred for the purpose of the business.

32. Mr Hall further contends that Mr Duckmanton has admitted that he was concerned about the threat of possible civil actions in damages against him that this represented a further purpose in defending the proceedings. Therefore his motivations did not simply relate to the preservation of his business.

33.  Mr Barnet argues that there was no duality of ‘purpose’, only ‘effect’. He also argues that avoiding a prison sentence was not a primary purpose for Mr Duckmanton, but secondary to defending his professional status and reputation. He says that Mr Duckmanton’s acquittal on the Manslaughter charge was a consequence or effect of defending the charge;  it was secondary and incidental to the main purpose of preserving his operator’s licence and livelihood.

34.  He argues that the case of McKnight v Sheppard supports this contention. In that case substantial legal expenses were incurred by a stockbroker defending himself on a gross misconduct charge before his professional body. The House of Lords held that the expenses were deductible. It was found that the tax-payer Appellant’s main purpose was to preserve his business and the fact that he also preserved his personal reputation was of secondary effect. Mr Barnet submits that the proceedings in McKnight were quasi-criminal and therefore the facts were similar in nature to the presence case and sufficient precedent to allow the Tribunal to regard Mr Duckmanton’s expenditure as deductible.

35.  Mr Hall disagrees with this view and argues that the McKnight case applies only to civil cases and cannot apply to defending a criminal charge. He does not accept in any event that the proceedings in McKnight were quasi-criminal and refers to the case of Spofforth and Prince v Golder.  In that case a firm of two chartered accountants claimed that in computing their profits for income tax purposes a deduction should be allowed for legal costs which they had paid in connection with the defence of a charge of conspiracy to defraud the Revenue in respect of one of the partners. The Appellants contended that the costs had been wholly and exclusively laid out for the purposes of their profession and accordingly were an allowable deduction against profits. The Court did not agree and held that legal costs incurred in criminal proceedings were not allowable as a deduction.

36.  Mr Hall raised the further point that the legal costs would have  included dealing with the two charges of perverting the course of justice until Mr Duckmanton pleaded guilty to those charges at the start of the first trial. Mr Duckmanton had agreed in correspondence with HMRC that these costs relating were not an allowable deduction for tax purposes. In any event however Mr Duckmanton had not offered any apportionment as between those costs and those relating to the defence of the Manslaughter charge.  The issue was not further argued on Mr Duckmanton’s behalf.

(c) Legal fees arising after the criminal proceedings

37.  Mr Barnet submits that any fees relating to proceedings before the Traffic Commissioner and the Court of the Transport Tribunal were not incurred until after the criminal proceedings had finished in October 2004 and in the interim period his business had continued under the management of his son Mr Nicholas Duckmanton. He therefore argues that those costs were properly incurred for the purposes of continuation of the business and could not have related to preserving the liberty of Mr Duckmanton. He accepts on behalf of Mr Duckmanton that the fees in this regard were small by comparison to the overall fees in connection with the criminal trial. Mr Duckmanton had not however proffered any apportionment for HMRC to consider and the issue was not argued in any detail.

Review of Case Law authorities

38.  Mr Barnet and Mr Hall assisted the Tribunal with a review of the relevant case law authorities.

39.  Mr Hall drew our attention to guidance on the “exclusively” test given by Millet L J in Vodafone:-