DECISION
Introduction
1.
This is an appeal by Noel White, a self-employed flying instructor and
examiner. Mr White gave flying lessons and conducted examinations at two
airports. Mr White claimed the cost of travel by car between his home and the
airports in his tax return for 2006-07. He also claimed certain expenses
relating to his home telephone.
2.
The Respondents (“HMRC”) decided that Mr White was not entitled to
deduct his travel expenses, ie the costs of driving his car and associated
capital allowances, on the ground that they were not wholly and exclusively
incurred for the purposes of his business. HMRC also reduced the telephone
expenses claimed on the ground that Mr White had not provided any evidence to
support his claim to use the telephone for business purposes.
3.
On 30 April 2009, HMRC issued discovery assessments and a closure notice
assessing Mr White for the disallowed expenses for 2003-04, 2004-05, 2005-06
and 2006-07. On 4 April 2013, HMRC issued a discovery assessment in respect of
travel expenses, and associated capital allowances, claimed by Mr White in his
tax return for 2008-09. The total amount thus assessed is £9,434.79. Mr White
appealed against the assessments and closure notice.
4.
On 4 June 2009, HMRC issued a Notice of Enquiry under section 9A Taxes
Management Act 1970 (“TMA”) and an Information Notice under Schedule 36 Finance
Act 2008 in relation to the tax year ended 5 April 2008. Mr White appealed
against the notices on the ground that they were unlawful. At the hearing of
the appeal, Mr Peter Clarke, who appeared for Mr White, withdrew the appeals
against the notices. Mr Clarke was careful to say that he did not concede that
the notices were lawful but felt that they added little to the proceedings,
involved complex matters of tax law and could lead to the appeals being
adjourned part heard. Accordingly, we do not consider the issue of the
lawfulness of the notices further in this decision.
5.
For the reasons set out below, we have held that Mr White was not
entitled to deduct the travel expenses as they were not incurred wholly and
exclusively for the purposes of his trade, profession or vocation. We have
also found that the closure notice and assessments disallowing some of the
telephone expenses claimed by Mr White were not excessive. Finally, we
concluded that the discovery assessments were properly made. Accordingly, our
decision is that Mr White’s appeal is dismissed.
Legislation
6.
During the period under consideration in this appeal, the legislation
governing the deduction of expenses for income tax purposes changed. Until 5
April 2005, Section 74(1)(a) of the Income and Corporation Taxes Act 1988
(“ICTA”) provided as follows:
“74 General rules as to deductions not allowable
(1) Subject to the provisions of the Tax Acts, in
computing the amount of the profits 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;”
7.
For the tax year 2005-06 and subsequent years section 34(1)(a) of the
Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) applied for income
tax purposes and was as follows:
“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
…
(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.”
8.
The assessments were discovery assessments made under section 29 TMA.
Section 29(1) relevantly provides:
“(1) If an officer of the Board or the Board
discovers, as regards any person (the taxpayer) and a year of assessment -
(a) that any income
which ought to have been assessed to income tax … have not been assessed, or
(b) that an assessment
to tax is or has become insufficient, or
(c) …
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.”
9.
Section 29(3) provides that, where a taxpayer has made and delivered a
return, an assessment cannot be made under section 29(1) in respect of that
year of assessment unless one of two conditions, set out in section 29(4) and
(5), is satisfied. The first condition is contained in section 29(4) and is
not relevant to this appeal. The second condition is set out in section 29(5)
as follows:
“(5) The second condition is that at the time when
an 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 enquiries into that return,
the officer could not have been reasonably 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.”
10.
What is meant by “information made available” is set out in section
29(6) as follows:
“(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 section 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 any such claim;
(c) it is contained in
any documents, accounts or particulars which, for the purposes of any enquiries
into the return or any such claim by an officer of the Board, are produced or
furnished by the taxpayer to the officer, whether in pursuance of a notice
under section 19A of this Act or otherwise; or
(d) it is information
the existence of which, and the relevance of which as regards the situation mentioned
in subsection (1) 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 notified in
writing by the taxpayer to an officer of the Board.”
Burden of proof
11.
Mr Clarke submitted that the burden of proof in the appeal was on HMRC.
Mr Clarke noted that HMRC relied on section 50(6) of the TMA as placing the
burden of proof on Mr White. Mr Clarke said that this was manifestly untrue.
Mr Clarke read out the section which is as follows:
“50 Procedure
…
(6) If, on an appeal notified to the tribunal, the
tribunal decides -
(a) that … the
appellant is overcharged by a self-assessment;
… or
(c) that the appellant
is overcharged by an assessment other than a self-assessment,
the assessment … shall be reduced accordingly, but
otherwise the assessment … shall stand good.”
12.
Mr Clarke submitted that section 50(6) was, as the heading to the
section revealed, merely concerned with procedure. Mr Clarke contended that
nothing in section 50(6) displaced the common law principle that he who avers
must prove.
13.
We agree that there is a principle that that he who asserts or avers
must prove. The general rule was reaffirmed by the Outer House of the Court of
Session in the Scottish case of SGL Carbon Fibres Limited v RBG Limited
[2012] CSOH 19 at [21] of the opinion. We cannot, however, accept Mr Clarke’s
submission that HMRC has the burden of proof in an appeal against the amount of
an assessment. It has been settled law for almost 90 years that the burden is
on the appellant to show that the sums charged to tax by an assessment are
excessive.
14.
In T Haythornthwaite & Sons Limited v Kelly (Inspector of Taxes)
(1927) 11 TC 657, Lord Hanworth MR said at 667:
“Now it is to be remembered that under the law as it
stands the duty of the Commissioners who hear the appeal is this: Parties are
entitled to produce any lawful evidence, and if on appeal it appears to the
majority of the Commissioners by examination of the Appellant on oath or
affirmation, or by other lawful evidence, that the Appellant is over-charged by
any assessment, the Commissioners shall abate or reduce the assessment
accordingly; but otherwise every such assessment or surcharge shall stand
good. Hence it is quite plain that the Commissioners are to hold the
assessment standing good unless the subject - the Appellant - establishes
before the Commissioners, by evidence satisfactory to them, that the assessment
ought to be reduced or set aside.”
15.
In Brady (Inspector of Taxes) v Group Lotus Car Companies plc
[1987] STC 635, Mustill LJ stated at 642:
“The starting point is an ordinary appeal before the
[Tribunal]. Here, however unacceptable the idea may be to the ordinary member
of the public, it has been clear law binding on this court for sixty years that
an inspector of taxes has only to raise an assessment to impose on the taxpayer
the burden of proving that it is wrong: Haythornthwaite & Sons Ltd v Kelly (Inspector of Taxes)
(1927) 11 TC 657.”
16.
More recently still, the position was confirmed by the Inner House of
the Court of Session in Rouf v HMRC [2009] CSIH 6, [2009] STC 1307 at
[29] where, having quoted the passage above from Haythornthwaite, the
Court stated that the general onus to show an overcharge lay upon the
appellant.
17.
In our view, these cases are not inconsistent with the general rule that
the burden of proving an assertion lies on the person making it but reflect the
fact, clearly shown by section 50(6) of the TMA, that it is the appellant who,
by bringing the appeal, makes the relevant assertion, namely that he or she has
been overcharged by an assessment. The cases cited above are binding on us and
we hold that the burden is on the appellant, Mr White, to satisfy us that the
sums charged to tax by the assessments and closure notice are excessive.
Issues
18.
The issues that we must determine in this appeal are
(1)
whether the travel expenses claimed by Mr White in respect of journeys
between his home and the airports were incurred wholly and exclusively for the
purposes of his business as a flying instructor and examiner;
(2)
whether the assessments in relation to the telephone expenses claimed by
Mr White are excessive; and
(3)
if the answer to either question or both is no, whether the assessments
for years ended 5 April 2004, 2005, 2006 and 2009 were properly made as
discovery assessments.
Evidence
19.
We heard oral evidence from Mr White who also provided a witness
statement. Mr Clarke, as well being a tax practitioner and Mr White’s
representative, was formerly also a qualified pilot and used Mr White’s
services for training in preparation for revalidation of his private pilot
licence instrument meteorological conditions rating. In that capacity, Mr
Clarke provided a witness statement and gave evidence. We also received a
witness statement and heard oral evidence from Mr Paul Bartram, one of the HMRC
officers who conducted the enquiry. In addition, the bundles contained a
comprehensive collection of correspondence and other documentation generated by
the enquiries which we have taken into account in this decision. On the basis
of that evidence, we make our factual findings on the basis of the balance of
probabilities as follows.
Facts
20.
Mr White is a senior flying instructor and examiner. He gives flying
lessons and examines pilots, including other examiners, in aircraft that fly
from airports at Bournemouth and Shoreham. Mr White lives at Maytrees, Fox
Hill, Haywards Heath, Sussex with his wife and teenage child. He operates his
business from his home. Mr White keeps his business records as well as
equipment such as charts and navigation equipment at his home. Mr White does
not have an office in his home. He uses a laptop for business purposes and
might use it in any one of a numbers of rooms in his house. Mr White does not
have a separate telephone line or number for the business.
21.
Mr White’s home is also the address at which he is registered with the
Civil Aviation Authority (“CAA”) and the CAA contacts him at that address. Mr
White reads any new CAA materials in order to stay up to date as an examiner at
home. Mr White’s home telephone number is on the CAA website and people can
contact him as a result of that but most of his work comes from recommendations
by word of mouth. People who wish to engage him as a flying instructor or
examiner contact Mr White at his home to make the arrangements by calling the
home telephone number. Mr Clarke contacted Mr White at his home because
although Mr White had a mobile phone, it had to be switched off when flying.
The home telephone is also used by Mr White to call the airports to check
weather conditions before a flight and to contact his students in advance of a
lesson to discuss flying conditions and plan the flight. The charges for the
telephone are billed monthly by British Telecom. The bills do not itemise the
calls except to show long distance calls. The telephone bill is paid from Mr
White’s personal bank account.
22.
Mr White gives flying lessons and examines pilots at either Shoreham
airport or Bournemouth airport. Mr White can teach at other airports as his
licence to instruct and examine applies throughout the UK. He has driven to Lydd airport to give a lesson but he is almost invariably at Shoreham or Bournemouth. Mr White travels between his home and the airports at Shoreham and Bournemouth to conduct his business as flying instructor and examiner. There was no
suggestion that Mr White travelled between Shoreham and Bournemouth to carry on
his business and we infer that he generally travels from his home to one or the
other airport and then returns to his home.
23.
Mr White does not have any office or other accommodation at either
Shoreham airport or Bournemouth airport or anywhere else. Mr White does not
own an aircraft nor does he hire one. He teaches his students or examines
pilots in aircraft that they own or hire. Mr Clarke hired an aircraft in which
to fly and be examined by Mr White.
24.
Mr White normally meets his students in the car park at each airport or
in the airport canteen. Typically, they would fly to another airport, land and
then return to the airport where they started. Any de-briefing after the
flight would be carried out in the aircraft, walking back to the airport
building or in the airport canteen over a cup of coffee. Mr White signs the
‘Tech-Log’ for the aircraft at the airport but only if the student is not
qualified to sign it, for example if the student does not hold a pilot
licence. If Mr White examines a pilot, he completes the report to the CAA at
home. The students or candidates usually pay Mr White by cheque at the
airport. Mr White pays the cheques into a separate business bank account.
25.
Mr White’s self-assessment tax return for the year ended 5 April 2007
was submitted on 21 January 2008. On 18 June 2008, Mr Bartram issued a notice
of enquiry under section 9A of the TMA into the return. As well as other
things that are not relevant to this appeal, the enquiry related to expenses of
£9,905 shown on the return. Mr Bartram wrote to Mr White’s tax advisers, Wood
Branson Dickinson, to ask for further information about the return. In a
letter dated 24 July 2008 to Mr Bartram, Wood Branson Dickinson stated that Mr
White did not keep a formal expenses book and provided a summary reconciliation
with receipts for the expenses claimed. The letter stated:
“Only the business proportion of motor expenses has
been included in the accounts. 15% has been disallowed as private usage. Our
client only uses his car for business with the odd private local journey, as he
has the use of the main family car for private usage.
There is a minimal annual allowance of £100 (i.e.
less than £2 per week) for use of home as office. Our client advises us that
he does not use any specific room in the house exclusively for business purposes.
There is no separate business telephone number.”
26.
In relation to the travel expenses, Mr Bartram initially disputed the
amount of estimated business usage (85%) claimed. On further consideration, Mr
Bartram concluded that Mr White's place of work was the airports where he
taught or examined pilots and that the costs of travelling between home and
places of work were not allowable. Mr Bartram decided that the motoring
expenses fell to be disallowed in full.
27.
In relation to the telephone expenses, Mr Bartram decided to check
whether the amount claimed as business use was reasonable. Mr White had
claimed £288 in relation to telephone calls. In the absence of itemised
telephone bills that showed how many calls had been made or any other records of
business calls made, Mr Bartram had to estimate the business use of the
telephone. Mr Bartram had information that showed that the number of flights
made during the year was 48. Mr Bartram was told that Mr White made telephone
calls to the airports to check weather conditions before flying. Mr Bartram
concluded that a reasonable claim would be for 100 calls i.e. 50 calls to the
airport and 50 calls to students. Mr Bartram estimated an average cost of £1
per telephone call. Accordingly Mr Bartram allowed £100 for telephone calls
during the year ended 5 April 2007.
28.
Having come to the conclusion that there were amounts to be disallowed
for the year ended 5 April 2007, Mr Bartram reviewed Mr White's tax returns for
earlier years. Mr Bartram asked for a breakdown of the amounts shown on the
tax returns the earlier years ending 5 April 2004 to 5 April 2006. Mr Bartram
also asked for confirmation of whether there had been any change in the way the
business was conducted in those years. Mr White did not provide any
information in relation to those years. Mr Bartram concluded that the amounts
claimed as expenses for the earlier years also included amounts that should be
disallowed on the same basis as the travel expenses that had been disallowed in
relation to the year ended 5 April 2007.
29.
On 30 April 2009, Mr Bartram issued a closure notice under section 28A
TMA 1970 for the year ended 5 April 2007 and discovery assessments under
section 29A TMA 1970 the years 2003-04, 2004-05 and 2005-06. To ascertain both
the telephone and motoring expenses for the earlier years, Mr Bartram used the
amounts for the year ended 5 April 2007 and, using the retail price index
(“RPI”), worked back to produce figures for the expenses in the three previous
years. In evidence, Mr Bartram described the process as an educated estimate
of the amounts.
30.
On 4 April 2013, Mr Bartram issued a discovery assessment for the year
2008-09 under section 29A TMA 1970 disallowing the motoring expenses and
related capital allowances claimed by Mr White on the same grounds as the
previous assessments.
31.
The details of the disputed discovery assessments and closure notice are
as follows:
|
Date of
assessments or closure notice
|
Tax year
|
Additional
amount
|
|
30 April 2009 discovery assessment
|
2003-04
|
£1,015.37
|
|
30 April 2009 discovery assessment
|
2004-05
|
£2,068.00
|
|
30 April 2009 discovery assessment
|
2005-06
|
£2,097.20
|
|
30 April 2009 closure notice
|
2006-07
|
£2305.99
|
|
04 April 2013 discovery assessment
|
2008-09
|
£1,948.23
|
Travel expenses
32.
It is well established that the costs of travel between a person’s home
and place of business are not generally allowable deductions even where the
person uses the home for business purposes, for example by carrying out some
business related activity there.
33.
In Newsom v Robertson [1952] 1 Ch 7 and (1952) 33 TC 452, the
Court of Appeal considered the case of a barrister, Mr Newsom, who had a home
in the country and his professional chambers in London. Mr Newsom did much of
his professional work in his well-equipped study at home, especially during
court vacations (when he only visited his London chambers on rare occasions for
conferences). Mr Newsom claimed a deduction for his costs of travelling
between his home and chambers. The Special Commissioners found that, in court
vacations, the basis of Mr Newsom's professional operations moved from London to his country home and the costs of travelling to London during vacations were
allowable.
34.
In the High Court, Danckwerts J held that none of the travel expenses
were deductible because they were not incurred wholly and exclusively for the
purposes of his profession. The basis of this decision was that the travel
expenses were incurred because he chose to live in the country and were thus
not wholly and exclusively for the purposes of his business. Danckwerts J
stated:
“He travels backwards and forwards between his home
and his chambers in 15, Old Square because he has to live somewhere, and
because he wishes to go backwards and forwards between his chambers and his
home. It does not seem to me that it makes any substantial difference that he
also carries on his profession and does a lot of work at a place which happens
to be his home. His motive, his object and his purpose in travelling between
these places, as it seems to me, are mixed.”
35.
The Court of Appeal upheld the decision of Danckwerts J. Denning LJ
said:
“A distinction must be drawn between living expenses
and business expenses. In order to decide into which category to put the cost
of travelling, you must look to see what is the base from which the trade,
profession, or occupation is carried on. In the case of a tradesman, the base
of his trading operation is his shop. In the case of a barrister, it is his
chambers. Once he gets to his chambers, the cost of travelling to the various
courts is incurred wholly and exclusively for the purposes of his profession.
But it is different with the cost of travelling from his home to his chambers
and back. That is incurred because he lives at a distance from his base. It
is incurred for the purposes of his living there and not for the purposes of
his profession, or at any rate not wholly or exclusively; and this is so,
whether he has a choice in the matter or not. It is a living expense as
distinct from a business expense.”
36.
Romer LJ agreed and stated that:
“… the object of the journeys, both morning and
evening, is not to enable a man to do his work but to live away from it.”
37.
Newsom established that travel between home and a place of
business is not allowable, as its purpose is, at least partly, to take the
taxpayer home and then to undo that journey. In those circumstances, it cannot
be said that the costs of travelling between home and a place of business are
incurred wholly and exclusively for the purposes of the trade, profession or
vocation which is the statutory test that must be satisfied before an expense
may be deducted.
38.
Mr Clarke did not seek to challenge the general rule that the costs of travel
between a person’s home and place of business are not allowable as shown by Newsom.
Mr Clarke relied instead on another decision of the Court of Appeal, namely Horton
v Young (Inspector of Taxes) [1972] Ch 157, [1970] 47 TC 60 (“Horton”).
39.
Mr Horton was a self-employed bricklayer who was the leader of a
bricklaying team of three men. Mr Horton had no business premises. He wrote
up his books and kept his tools at home. During the relevant period, Mr Horton
worked for a single main contractor, Mr Page. Mr Page would visit Mr Horton at
his home to agree the details of each job, such as the site and the rate of
pay. During the year in question, Mr Horton worked at seven different sites,
at distances of between 5 and 55 miles from his home. He mostly worked at each
site for a period of three weeks or so. Mr Horton travelled daily between his
house and the building site where he was working by car, taking his team to the
site with him. The Inland Revenue, as HMRC then were, refused Mr Horton’s
claim to deduct the expenses incurred in travelling between his home and the
various building sites. The Special Commissioners decided that the expenses of
travelling between Mr Horton’s home and the building sites were not allowable
as a deduction. Mr Horton appealed.
40.
In the High Court in Horton, Brightman J held that the expenditure
was deductible and allowed Mr Horton’s appeal. He observed:
“In the majority of cases a self-employed person has
what can properly be described as his place of business or base of operations.
In the case of the medical practitioner, it is his surgery or consulting rooms;
in the case of the shopkeeper it is his shop; in the case of the barrister it
is his chambers, and so on. There are, however, some occupations in which the
self-employed person does not have any location which can readily be described
as his place of business, but rather a number of places at which from time to
time he exercises his trade or profession. It seems to me that there is a
fundamental difference between a self-employed person who travels from his home
to his shop or his chambers or his consulting rooms in order to earn profits
from the exercise of his trade or profession and a self-employed person who
travels from his home to a numbers of different locations for the purely
temporary purpose at each such place of there completing a job of work, at the
conclusion of which he attends at a different location. … The point is that
his trade or profession is by its very nature itinerant.”
41.
Brightman J also observed:
“In my view, where a person has no fixed place or
places at which he carries on his trade or profession but moves continually
from one place to another, at each of which he consecutively exercises his
trade or profession on a purely temporary basis and then departs, his trade or
profession being in that sense of an itinerant nature, the travelling expenses
of that person between his home and the places where from time to time he
happens to be exercising his trade or profession will normally be, and are in
the case before me, wholly and exclusively laid out or expended for the
purposes of that trade or profession.”
42.
The Inland Revenue appealed to the Court of Appeal which held that Mr
Horton’s travel expenses between his home and the sites were allowable and
dismissed the appeal. In the Court of Appeal, Lord Denning MR compared this
case with Newsom and said:
“The present case is very different. Mr Horton's
base of operations was Eastbourne. He claims his travelling expenses to and
from that base. I think he is entitled to deduct them. ... On the finding of
the Commissioners there is only one reasonable inference to draw from the
primary facts. It is that Mr Horton's house at Eastbourne was the locus in quo
of the trade, from which it radiated as a centre. He went from it to the
surrounding sites according as his work demanded.”
43.
Salmon LJ agreed. He held that Mr Horton's house was the base from
which he carried on his business and rejected the submission that Mr Horton had
shifting bases of business at each site at which he worked. Salmon LJ observed
that Mr Horton agreed all his contracts at his home which was where Mr Page,
his only customer, sought him out and where he kept his tools and business
books and did his office work. By contrast, the sites where Mr Horton actually
carried out his bricklaying work were many and spread across a large area.
44.
Stamp LJ also agreed and pointed out how difficult it was to draw a line
between what he called itinerant traders, whose business actually involved
travel, and persons such as the barrister Mr Newsom. He observed that:
“The facts of such cases are infinitely variable and
one must … look at the facts of each case and decided whether the expenses are
money wholly and exclusively laid out or expended for the purpose of the trade
or the profession.”
45.
Stamp LJ found that Mr Horton had “no place which you could call his
place of business except his home”: he entered into contracts there, he kept
his tools and other trading items there, and it was the only place where he was
to be found. Stamp LJ held that the home was the centre of Mr Horton’s
business activities. He rejected the general proposition that the place or
places at which a man carries out the work he has contracted for must
necessarily be his place or places of business.
46.
Horton was considered by Lewison J in Jackman (Inspector of
Taxes) v Powell [2004] EWHC 550 (Ch), [2004] STC 645, in the context
of another claim to deduct expenses of travel between home and a place of
work. Mr Powell was a milkman who operated a milk round at some distance from
his home under a franchise agreement with Unigate. Every day, Mr Powell
travelled from his home to the Unigate depot some 26 miles away, where he
collected his milk float, milk and other items before going on his round which
was near the depot. Mr Powell kept his float and stock at the depot. Mr
Powell was registered for VAT, giving his home address as his place of
business. He did all his office work at home and kept all his business records
there. Mr Powell claimed to deduct the expenses of travelling between his home
and the depot. The Inland Revenue disallowed the expenditure. The Special
Commissioner allowed Mr Powell’s appeal against that decision. The Inland
Revenue appealed. In the High Court, Lewison J considered Horton and
pointed out that Mr Horton’s places of work were entirely unpredictable.
Lewison J went on to hold that the 35 roads of Mr Powell's milk round plainly
amounted to his base of operation.
47.
We were also referred to Mallalieu v Drummond (Inspector of Taxes)
[1983] STC 665. This case concerned a claim for the costs of suitable clothing
for wearing in court by a barrister. Ms Mallalieu sought to deduct the
expenses on the basis that she would not have purchased such items of clothing
if they were not required in order to carry on her profession. The Inland
Revenue disallowed the claim and Ms Mallalieu appealed. The General
Commissioners dismissed Ms Mallalieu’s appeal but she was successful in the
High Court and the Court of Appeal. The case came before the House of Lords
which held that, in order to determine whether an expense was for the purposes
of a taxpayer’s business, it was necessary to discover the taxpayer’s object in
making the expenditure. Although the conscious motive of a taxpayer was of
vital significance in ascertaining the taxpayer’s object, it was not decisive
and the Commissioners had been entitled to find on the facts that, as Ms
Mallalieu had to wear something, one object was the provision of clothing that
she needed as a human being. It followed that the expenditure was not incurred
wholly and exclusively for the purposes of her profession and was not
deductible.
48.
All the above cases were examined closely by the FTT (Judge Kevin Poole
and Mr Kamal Hossain FCA FCIB) in Samad Samadian v HMRC [2013] UKFTT 115 (TC). Dr Samadian was employed as a full time consultant in the NHS at certain
NHS hospitals. He also had a private practice. Dr Samadian had an office at
his home where he did work relevant to his private practice. He also hired
consulting rooms at two private hospitals where he saw his private patients. A
dispute arose between Dr Samadian and HMRC as to whether the expenses of
certain journeys, including travel between home and the private hospitals, were
deductible as expenses incurred wholly and exclusively for the purposes of his
private practice. The matter came before the FTT.
49.
The FTT accepted that Dr Samadian’s home was a place of business where
he carried out part of the professional work necessary to his overall
professional practice as well as the majority of the administrative work
related to it.
50.
Having referred to the fact that, in Horton, the taxpayer’s
single business base was at his home, the FTT observed at [71] that:
But things now are less simple than in 1970. There
is an almost infinite variety of methods of working for the self-employed in
the current era. In a situation where a taxpayer’s business activities are
fragmented across a number of different locations (including his home) and he
claims to deduct the cost of travel between those locations, it is much less
straightforward to apply the “wholly and exclusively” test than it was in the
four main cases we were referred to. In particular, judicial comments
specifically made in the context of a single “business base” (as was found to
exist in Newsom, Horton, Sargent and Jackman) need
careful consideration before they are applied in the context of multiple
“places of business”.
51.
The FTT compared the situation in Horton with that of Dr Samadian
at [73] – [80] as follows:
“73. What were the decisive features in Horton?
[Counsel for Dr Samadian] argues they were that:
(1) Mr Horton held
himself out as trading from his home address and he negotiated and entered into
his contracts there. The Appellant, he says, is in a similar position. He
holds himself out as practising from his home address, to his patients, the
insurance companies and his professional body; the formation of his contracts
is ‘elusive’ in its location and involves little or no negotiation and
therefore as a factor carries little weight in this case.
(2) Mr Horton kept his
tools (the essential equipment for his business) at his home. The Appellant
does the same with his medical instruments.
(3) Mr Horton kept his
books and records at his home. The Appellant does the same, both with his
business records and his clinical records.
74. In addition, [Counsel for Dr Samadian] points to
the fact that the Appellant carries out significant administrative and
professional work at his home.
75. On this basis, [Counsel for Dr Samadian] argues
that the Appellant's position is parallel or analogous to that of Mr Horton and
all his travel to and from his home should therefore be allowable.
76. However we consider that [Counsel for Dr
Samadian]'s analysis misses an important point. Denning LJ held that Mr
Horton's home was:
‘the locus in quo of the
trade, from which it radiated as a centre. He went from it to the surrounding
sites according as his work demanded.’
Salmon LJ held that Mr Horton's home was:
‘the base from which
[he] carried on his business’.
Stamp LJ held that Mr Horton had:
‘no place which you
could call his place of business except his home’.
In other words, all three of the Lords Justices held
that Mr Horton's home was the only place of business he had. That was why his
travel to and from his home was deductible; as Salmon LJ put it:
‘Since 2 Penshurst Close
was his business base and the place where his chief, and indeed only, customers
knew that he was always to be found, it would be understandable that
exclusively for the purposes of his business he would think it right to return
to his base at night from any site on which he was working during the day.’
77. When viewed in this way, we consider the
analysis in Horton is put in its proper context. In our view, it is good
authority for the limited proposition that a taxpayer who can establish that
his business base is at his home and that he has no place of business away from
it can generally (absent some non-business object or motive for the travel)
claim a deduction for his travel between his home and the various places where
he attends from time to time for the purposes of his business.
78. We acknowledge there is no particular
significance attaching to the description ‘itinerant’ under the legislation or
the case law, but we consider it does provide a readily understandable
shorthand description of the situation of a trader such as Mr Horton, whose
travel expenses to and from his home will generally be deductible (though,
following Brightman J in Horton, we acknowledge that this may not always
be the case, for example where he lives in a place far removed from his
operational area).
79. Why did the Court of Appeal not find that the
building sites at which Mr Horton worked amounted to additional places of
business? It was because of the lack of any fixed or regular place at which Mr
Horton actually plied his trade. They were effectively holding that Mr Horton
was itinerant (though only Stamp LJ used that word). …
80. Lewison J in Jackman acknowledged this
important point when he said (with reference to Denning LJ’s comment set out at
[76] above):
‘It seems to me that the
phrase ‘according as his work demanded’ is an important one. There is no
predictability about Mr Horton's places of work when he was employed on a bricklaying
contract. He would have to go wherever Mr Page's main contracts took him.’
52.
At [83] of the decision, the FTT, having reviewed the authorities,
concluded that the two private hospitals were Dr Samadian’s places of business
because he attended them regularly and predictably to carry out his
professional activities as more than just a visitor. The FTT did not accept
the submission that Dr Samadian was an itinerant worker in the same way as Mr
Horton. On the basis that Dr Samadian had a number of places of business,
including the two private hospitals, and was not an itinerant worker like Mr
Horton, the FTT held that Dr Samadian fell outside the ratio of Horton.
The FTT ruled that travel expenses for journeys between Dr Samadian’s home and
the private hospitals were not in general deductible. Dr Samadian appealed to
the Upper Tribunal.
53.
At the hearing of this appeal, we told the parties that we were aware
that the Upper Tribunal was shortly to hear the appeal in Samadian and
that we thought that the Upper Tribunal’s decision might provide useful
guidance on the issues that arose in this case. We indicated that we would
delay issuing our decision until we had seen the decision of the Upper Tribunal
in Samadian and, if we considered that it was or might be relevant to
our decision in this case, we would invite the parties to make further
submissions in writing.
54.
In a decision released on 15 January 2014, [2014] UKUT 13 (TCC), the
Upper Tribunal (Sales J) upheld the FTT’s decision and dismissed Dr Samadian’s
appeal. The Upper Tribunal held that the FTT was correct, at [83], to
characterise the private hospitals as places of business. The Upper Tribunal
endorsed the FTT’s analysis of Horton agreed with the reasons it gave
for distinguishing Horton from the case before it.
55.
The Upper Tribunal endorsed the FTT’s focus on establishing whether the
travel expenses were incurred (or laid out) wholly and exclusively for the
purposes of Dr Samadian's private practice. The Upper Tribunal observed at
[18] that:
“… the FTT correctly directed itself that the only
statutory test which fell to be applied was the ‘wholly and exclusively’ test
set out in section 74 ICTA and section 34 ITTOIA. The authorities provide
guidance and illustrations from which it is possible to reason by analogy, but
the FTT correctly recognised that it should not be distracted in its analysis
from the critical question it had to determine, which was set by the statutory
test.”
56.
At [25] and [26], the Upper Tribunal held:
“25 The ‘wholly and exclusively’ test is to be
applied pragmatically and with regard to practical reality. Private interests
may be served by expenditure in the course of a trade or profession, but be so
subordinate or peripheral to the main (business) purpose of the expenditure as
not to affect the application or prevent the satisfaction of the statutory
‘wholly and exclusively’ test. On the other hand, as the FTT correctly noted,
the decision and reasoning in Mallalieu show that a reasonably strict
test of focus on business purposes is applicable, and the language used in the
relevant provisions likewise supports that view.
26 In my opinion, it is appropriate that in applying
the statutory test the tax tribunals should be practical and reasonably robust
in their approach. … They should bear in mind that it is desirable, as an
aspect of the rule of law, that in broad terms like cases should be treated
alike. Accordingly, they should be willing to draw analogies where it is
sensible for cases to be grouped together for similar treatment, but at the
same time should recognise that at some point the practical approach which is
appropriate will require a clear line to be drawn, where the analogies which
are pressed on them become remote from the paradigm cases where a particular
tax treatment is clearly warranted.”
57.
The Upper Tribunal held at [30] and [32] that Dr Samadian’s journeys
from home to the private hospitals and back again were made partly for the
purpose of conducting his private practice at the hospitals and partly for the
private or non-business purpose of enabling him to maintain his home at a
location away from the place where he carried on his private practice. The
Upper Tribunal concluded in [32] that:
“… it cannot be said that the expenses incurred by
Dr Samadian to undertake these journeys are incurred “wholly and exclusively”
for the purposes of his private practice, and accordingly they also are not
deductible expenses.”
58.
The Upper Tribunal summarised the position as follows in [46]:
“Travel expenses are treated as deductible in
relation to itinerant work (such as Dr Samadian’s home visits to patients).
Travel expenses for journeys between places of business for purely business
purposes are treated as deductible. Travel expenses for journeys between home (even
where the home is used as place of business) and places of business are treated
as non-deductible (other than in very exceptional circumstances …).”
59.
We communicated the UT’s decision in Samadian to the parties and
gave then the opportunity to make further submission in writing which they both
did. We have taken account of those submissions in our discussion of the
issues below.
60.
Mr Clarke submitted that the facts of this case exactly paralleled those
of Horton and we should reach the same conclusion as the Court of Appeal
in that case. Mr Clarke referred to [79] of the FTT’s decision in Samadian
(set out above) which analysed the ratio of Horton and was quoted and
endorsed by the UT in [20] of its decision in that case. Mr Clarke said that
Mr White’s profession was based at his home and he had no separate place of
business other than at his home and, as in Horton, everything radiated
from that central point. Mr Clarke contended that Mr White was an itinerant
worker in the same way as Mr Horton in that he went from one airport to
another, exercising his profession in accordance with the verbal contracts made
with his students who contacted him at his home. Mr Clarke submitted that,
applying Horton, the journeys to and from Mr White’s home to the airports
were allowable.
61.
Mr Clarke also referred us to HMRC’s guidance at BIM 37675 which states
as follows:
“No separate business premises
There are some types of business where the taxpayer
has no separate business premises away from home. For example, a doctor whose
only office is a surgery attached to his home or an accountant whose only
office is at his residence. In these cases, the doctor's costs in travelling
to visit patients and the accountant's costs incurred in visiting clients are
both clearly allowable. Similarly an insurance agent who has no office away
from their residence but who visits clients would also incur allowable
travelling expenditure.
In the cases above, the taxpayer would normally
visit a large number of different premises to carry on the business. The
position is rather different where a subcontractor works at one or a very small
number of different sites during the year. In such a case it may be that the
premises where the taxpayer carries on the business are, in fact, the business
base. If this is so, the cost of travelling between the taxpayer's home and
the business base should be disallowed.
Following the decision in Horton v Young
[1971] 47 TC 60 (see BIM37620), where a subcontractor works at two or more
different sites during a year travelling expenses between the taxpayer's home
and those sites should normally be allowed.
However, where the subcontractor works at a single
site in the year and this is the normal pattern for the business, travelling
expenditure between the subcontractor's home and the single site should only be
allowed if the home is, in some real sense, the centre or base of the
business. That will depend on the facts of the case and specifically what
business activities are carried out at home.”
62.
Mr Clarke said that the guidance in the first and third paragraphs of
BIM 37675 above was consistent with and supported his submissions in this
case. Mr Clarke’s case was that, as described in BIM 37675, Mr White had no
separate business premises apart from his home; he worked at two different
sites, namely the airports, during the year and, therefore, his travel expenses
between his home and the airports should be allowed.
63.
Mr David Linneker, who represented HMRC, accepted that if we were to
find that Mr White’s home is his only place of business then Horton
would apply and his travel expenses would satisfy the wholly and exclusive
statutory test and be allowable. Mr Linneker submitted that Horton did
not apply in this case because the facts were very different and Mr White’s
home was not his base of operations within the meaning of Horton
although it was a place of business where Mr White carried out some
administrative functions of his business. Mr Linneker contended that Mr White
also had places of business at the airports where he met, instructed and
examined his students and carried out his professional activities. Travel
between home and places of business is not allowable in these circumstances as
the expenditure was not incurred wholly and exclusively for the purposes of the
profession.
64.
Mr Linneker submitted that Mallalieu is important in clarifying
the distinction between ‘object’ or ‘motive’ on one hand and ‘effect’ on the
other and making it clear that a court may look behind the conscious motive of
a taxpayer where the facts are such that an unconscious object should also be
inferred. Mr Linneker contended that it followed from Mallalieu that Mr
White’s claim for a deduction for travel expenses also failed because the facts
were such that there must have been a non-business motive in mind as well as a
business purpose. The cost of travelling between home and the airports arose
as a result of Mr White’s decision to live away from the airports.
Consequently, the expenditure has a mixed business and private purpose and is
generally not allowable because the journeys are not wholly and exclusively for
the purposes of the business.
65.
In approaching this issue, we apply the statutory test in section 74
ICTA and section 34 ITTOIA, namely whether the expenses relating to Mr White’s
journeys between his home and the airports at Bournemouth and Shoreham were
incurred wholly and exclusively for the purposes of his business. The cases
discussed above provide only guidance as to and illustrations of the application
of the test.
66.
We accept that, although he did not have a separate office in the house,
Mr White’s home was a place of business. HMRC allowed Mr White to deduct some
costs in relation to his use of the home as an office and also some of the home
telephone charges as expenses relating to business. Mr Clarke, in effect,
contended that the two airports were not Mr White’s places of business but, as
in Horton, places at which he exercised his trade or profession from
time to time. We disagree. We consider that Mr White also had places of
business at the two airports where he met his students, taught them to fly and
sometimes examined them or qualified pilots. Mr White worked almost
exclusively at Bournemouth and Shoreham airports. Although Mr White could
teach and examine at other airports, he could only give one example of ever
doing so which was when he taught at Lydd airport. We find that the two
airports were Mr White’s places of business because he attended them regularly
and predictably to carry out his professional activities. The fact that Mr
White was only contacted at his home to arrange flying lessons or examinations
does not mean that the airports where Mr White invariably carried out those
activities were not places of business.
67.
It follows, in our view, that Mr White’s situation is not the same as
that of Mr Horton. Both Mr Horton and Mr White conducted their businesses from
their homes but the similarity ends there. Mr Horton’s only place of business
was at his home. Although Mr Horton worked in many other places, he did so
with no predictability or regularity and none of them became his place of
business. Mr White conducted his business from the same two airports
throughout the year. Mr White’s situation was much closer to that of Dr
Samadian than to that of Mr Horton. Like Dr Samadian, Mr White did not have a
fixed presence at the places, the airports, where he carried on his business
but he attended them regularly and predictably to teach people to fly or
examine them. Although he did not hire a room as Dr Samadian did, Mr White
used the facilities of the airport to carry out his professional activities as
more than just a visitor. We do not, however, reach our decision on the basis
that Mr White’s circumstances were closer to those of Dr Samadian than Mr
Horton but on the basis of the application of the statutory test.
68.
We conclude that the travel expenses claimed by Mr White in respect of
the journeys between his home and the airports were not incurred wholly and
exclusively for the purposes of his profession as a flying instructor and
examiner but also as a result of his decision to live away from the airports at
Bournemouth and Shoreham where he carried on his business. Accordingly, Mr
White was not entitled to deduct the expenses of travelling between his home
and the airports.
Telephone expenses
69.
In relation to the telephone expenses, Mr Clarke submitted that HMRC had
not proved that the reduction of £288 claimed to £100 was correct. He
contended that it was simply a guess. He also maintained that the figures in
relation to telephone expenses for the years 2003-04, 2004-05 and 2005-06 were
guesses arrived at by applying the RPI to the original guess. In effect, Mr
Clarke’s submission was that the burden of proof is on HMRC to show that the
amounts disallowed in respect of telephone expenses are correct.
70.
We have already held that the burden is on Mr White to satisfy us, on
the balance of probabilities, that the amounts charged to tax by the
assessments and closure notice are excessive. The telephone was the only one
in the home and available for general family use. The telephone bills were
paid out of Mr White’s personal bank account rather than his business account.
Mr White did not keep any record of the business use of the telephone or
produce any evidence to support the amount claimed for business use. His
evidence before us was that he called the airports to check weather conditions
and also called students in advance of flights and sometimes on other occasions.
We accept that evidence and find that it confirmed, rather than undermined,
the assumptions made by Mr Bartram to estimate the business use of the
telephone. We find that Mr Bartram’s calculation of the telephone expenses
relating to business use during 2006-07 was a reasonable estimate. We also
accept that the use of the RPI produced a reasonable estimate of the position
for the years 2003-04, 2004-05 and 2005-06. In the absence of any contrary
evidence, our decision is that Mr White has failed to establish, on the balance
of probabilities, that the closure notice and assessments in relation to the
telephone expenses claimed by him were excessive.
Validity of the assessments
71.
Where a person has submitted a return, HMRC cannot make a discovery
assessment under section 29(1) TMA in relation to that return unless one of two
conditions is met. The relevant condition in this case is that contained in
section 29(5) TMA. The effect of section 29(1) and (5) in this case is that
HMRC could only assess Mr White if Mr Bartram discovered that Mr White’s
self-assessment tax return showed insufficient tax and that, at the time when
the enquiry window closed, HMRC could not reasonably have been expected to be
aware of the insufficiency on the basis of the information provided on Mr
White’s tax return.
72.
Mr Clarke submitted, on behalf of Mr White, that HMRC were not entitled
to raise the assessments in relation to years 2003-04, 2004-05, 2005-06 and
2008-09 under section 29 TMA. Section 29(1) applies where HMRC discover that
income has not been assessed to tax or has not been sufficiently assessed. Mr
Clarke contended that HMRC had not discovered anything. Mr Clarke contended
that a discovery means that HMRC become aware of some definite and exact figure
which they did not have at the time of the return. He stated that the evidence
showed that HMRC had simply made a guess and used the RPI to calculate a
figure. His case was that there was no provision in section 29 for making an
estimated discovery and that the discovery must be of a finite amount.
73.
We do not accept Mr Clarke’s submission that “discover” in section 29(1)
TMA is restricted to a situation where HMRC become aware of a definite and
exact amount of income not included in the return or tax not assessed. The
meaning of discover is extremely broad. This can be seen from the decision of
the Upper Tribunal in HMRC v Charlton Corfield and Corfield [2012] UKUT 770. At [28], the Upper Tribunal held:
“We agree with [counsel for the taxpayer] that the
word ‘discovers’ does connote change, in the sense of a threshold being
crossed. At one point an officer is not of the view that there is an
insufficiency such that an assessment ought to be raised, and at another he is
of that view. That is the only threshold that has to be crossed.”
And at [37], it held:
“In our judgment, no new information, of fact or
law, is required for there to be a discovery. All that is required is that it
has newly appeared to an officer, acting honestly and reasonably, that there is
an insufficiency in an assessment. That can be for any reason, including a
change of view, change of opinion, or correction of an oversight.”
74.
The Upper Tribunal in Charlton concluded at [44] that a discovery
assessment can be made merely where the original HMRC officer changes his mind
or where a different officer takes a different view.
75.
In Langham (Inspector of Taxes) v Veltema [2004] STC 544, 76 TC 259, Auld LJ stated at [36]:
“It seems to me that the key to the scheme is that
the Inspector is to be shut out from making a discovery assessment under the
section only when the taxpayer or his representatives, in making an honest and
accurate return or in responding to a Section 9A enquiry, have clearly alerted
him to the insufficiency of the assessment, not where the Inspector may have
some other information, not normally part of his checks, that may put the
sufficiency of the assessments in question.”
76.
In this case, there was nothing in or with Mr White’s tax returns to
alert HMRC to the nature of the expenses claimed. The self-assessment tax
return for 2006-07 simply included an amount of £9,905 claimed as expenses
without any breakdown. Mr Bartram only became aware of the nature of the
expenses claimed in response to his notice of enquiry into the 2006-07 return.
77.
Mr Bartram only became aware that Mr White made regular journeys from
his home to Bournemouth and Shoreham airports, where he carried on his
business, when he had seen the flight log. It was only in April 2009, having
made enquiries, that Mr Bartram concluded that the travel expenses were not
allowable business expenditure. We consider that that was a discovery.
78.
Further, Mr Bartram only became aware that the claim for the business
element of telephone costs was not supported by the telephone bills or other
records when he made enquiries into the 2006-07 return. The information
provided by Mr White’s accountants and Mr Bartram’s own calculations led Mr
Bartram to conclude that there was an insufficiency in Mr White’s
self-assessment and that further assessments were necessary. That, too, was a
discovery.
79.
In the circumstances of this case, we find that HMRC made a discovery
which entitled them to make an assessment under section 29(1) TMA and that the
condition in section 29(5) was satisfied. Accordingly, we hold that the
assessments for the years 2003-04, 2004-05, 2005-06 and 2008-09 were properly
made as discovery assessments.
Decision
80.
For the reasons set out above, our decision is that
(1)
Mr White was not entitled to deduct the expenses of travelling between
his home and the airports at Bournemouth and Shoreham because the expenses were
not incurred wholly and exclusively for the purposes of his trade, profession
or vocation;
(2)
the closure notice and assessments in relation to the telephone expenses
claimed by Mr White were not excessive; and
(3)
the discovery assessments were properly made.
Accordingly, Mr White’s appeal is dismissed.
Right to apply for permission to appeal
81.
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.
GREG SINFIELD
TRIBUNAL JUDGE
RELEASE DATE:
20 February 2014
