ACCA on Revisiting a case where not everything charged in the profit and loss account of a trade, profession or vocation is an allowable deduction for tax purposes.
At this time of year, you tend to remember cases which influence what you can claim. Here we revisit a case where not everything charged in the profit and loss account of a trade, profession or vocation is an allowable deduction for tax purposes.
The legislation disallows any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation. This means that the rule is only satisfied if the taxpayer’s sole purpose for incurring the expense is for the purposes of their trade, profession or vocation. If there is a non-trade purpose, then the expenditure is not allowable.
Dual-purpose expenditure is expenditure that is incurred for more than one reason. If one of the reasons is not for business purposes, the expenditure fails the statutory test and there is no provision that allows a ‘business’ proportion. But see the comments here concerning expenditure that the courts have allowed as deduction against the income of the trade, profession or vocation.
Essentially, the issues in dispute concern the deductibility of travelling expenses incurred by Ms Daniels (a self-employed exotic dancer) between her home and Stringfellows (a nightclub in central London) and of certain other items including clothing, lingerie, dry-cleaning, make-up, beauty treatments. These costs were claimed as allowable in Ms Daniels’ tax returns for the years in dispute.
Deductibility of travelling expenses incurred by Ms Daniels between her home and Stringfellows
Normally the cost of travel between the business base and other places where work is carried out is an allowable expense, while the cost of travel between the taxpayer’s home and the business base is not allowable. Let’s look at these two contrasting cases:
Horton v Young  47 TC 60
In this case Mr Horton, a subcontracting bricklayer, claimed travel from work to site as an expense. Mr Horton’s tools were kept at home and his books were written up at home. In addition, he held meetings at his house with contractors to establish fees. The travel included daily travel to building sites, picking up other bricklayers and inter-site travel. The daily travel varied between five and 55 miles. Each project would take no more than three weeks. There was no office at the sites.
The Court of Appeal held that Mr Horton’s home was his ‘business base’ and as a result the whole expense was allowable as it satisfied the wholly and exclusively rule. In conclusion, travel expenses in relation to itinerant work or for journeys between places of business for purely business purpose are deductible.
Samad Samadian v Revenue & Customs  UKFTT 115
In this case Dr Samadian was a self-employed consultant geriatrician who was also a full-time consultant working for two NHS hospitals. Dr Samadian claimed the costs of travelling between private clinics and NHS hospitals and between private clinics and his home.
Although the judge accepted that Dr Samadian did have a place of business at home, there was a ‘mixed object’ in the travelling between home and the private hospitals. Because the office was also Dr Samadian’s home, part of the object of the journey was to allow him to maintain a home in a location separate from his place of employment. So the judge decided that the cost of these journeys was non-deductible.
The journeys between the NHS hospitals and the private hospitals were also regarded as non-deductible on the grounds that the travel was not an integral part of the business itself.
In conclusion, travel expenses for journeys between home (even if the home is used as place of business) and places of business are treated as non-deductible (other than in very exceptional circumstances).
In the case of Ms Daniels, the first-tier tribunal followed the upper tribunal’s decision in Samadian and ruled that her travelling expenses were not allowable because they had a dual purpose. They were incurred to travel from home to work and back again, as well as from her home office location to her place of work at the club in London.
Items including clothing, lingerie, dry-cleaning, make-up, beauty treatments and hairdressing (including hair extensions)
Normal everyday clothing is not allowable because of the duality of purpose as established in Mallalieu v Drummond HMRC. In this case the judge concluded that even though Ms Mallalieu’s sole conscious motive was to comply with professional rules, this was not the relevant test. The clothes were also used for ‘warmth and decency’ and therefore no apportionment was possible.
By contrast, uniforms, theatrical costumes etc that can only be used on stage are allowable and not deemed to be normal everyday clothing [BIM 37910]. Ms Daniels’ evidence was that her appearance was a very important part of her role at Stringfellows. The costumes and dresses that she wore were not the type of clothing that would be suitable to be worn outside the club. Her dresses were long, see-through and skimpy. They were frequently decorated with sequins so that they dazzled under the lights. In addition, her costumes would include nurses’ and schoolgirls’ uniforms for ‘fancy dress’ evenings. Her shoes had six to ten inch stiletto heels and were made so that it was possible to hang upside down from a pole when her performance included pole dancing. Her high-heeled shoes tended to wear out quickly.
The tribunal accepted Ms Daniels’ evidence that the clothes she bought to perform at the club could not be worn outside, and concluded that these items were solely for the purposes of her business and therefore deductible.
As regards the cost of cosmetics, these had to be heavily applied in a theatrical (over the top) manner in order to last the whole evening of Ms Daniels’ performances. She did not wear that make-up outside her work.
In respect of perfume, Ms Daniels said that she did not wear perfume other than for her performances. Her performances involved ‘getting naked in front of drunken men’ and she did not want perfume to feature in her everyday life to remind her of her dancing job.
It was held that while most women (irrespective of what work they do or whether they work at all) wear make-up of some sort, a stage performer has to wear a different level of make-up and so stage make-up is therefore allowable as part of a performer’s costume. In the judgement the court stated that ‘the fact that Ms Daniels could have worn make-up and the perfume outside her work is not the correct test. Her evidence was that she did not do so and that she bought those items solely for her performances. We consider that she incurred the expenditure wholly and exclusively for the purposes of her performances and that it was therefore deductible.’
As regards the cost of hairdressing, hair extensions and various beauty treatments (eg manicures, fake tanning and waxing), HMRC’s own practice as outlined in its own Manuals (BIM50160) states ‘where a performer claims a deduction for the cost of cosmetic surgery to correct some perceived inadequacy in their appearance then you need to examine whether one of the purposes in incurring those costs was to gratify their private wish to improve/change their appearance. If it was, no deduction will be due. Some performers may, however, be able to show that expenditure on cosmetic surgery has been incurred solely for professional purposes. Such expenditure may be allowed.’
The court considered that the purpose of Ms Daniel’s expenditure was to enhance her appearance for the purposes of her performances. The effect may have been that her appearance in her everyday life was also enhanced, but that was not the purpose in incurring the expenditure. As a result, the expenditure for hairdressing and other beauty treatments was deductible.
Receipts or other primary records
Although a cashbook was provided showing expenses totalling £8,629.48 and which were claimed as an allowable deduction, receipts and invoices were provided which substantiated less than 10% of the amount claimed.
Ms Daniels stated that it was not possible to collect and retain receipts for all expenses as in many cases her purchases were made from market stalls, whose stallholders did not provide receipts.
The judge decided that while Ms Daniels should have kept better records, he had no reason to believe that she had not incurred the expenditure and, as a result, the claims should be accepted regardless of the lack of invoices.
The validity of a penalty assessment under Schedule 24 for ‘carelessness’
On penalties, the court agreed that HMRC was justified in charging penalties for the incorrectly claimed travelling expenses. The argument that Ms Daniels relied on her accountant to prepare and submit the tax returns was not accepted. However, the penalties were reduced on the basis of one HMRC officer’s ‘unreasonable approach’, which had ‘soured the relationship’ with the taxpayer and her adviser.
This article has been shared from ACCA In Practice, to whom copyright belongs. Whitefield Tax are an ACCA Member Firm