Healy
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 May 2014 |
| Date | 28 May 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Christopher Staker, Mrs Rayna Dean FCA
Nichola Ross Martin, of Ross Martin Tax Consultancy Limited, appeared for the Appellant
Oliver Conolly, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax Deductions for accommodation Whether wholly and exclusively incurred for the purposes of the profession of actor Appeal dismissed Procedure Upper Tribunal setting aside decision of FTT on appeal by HMRC and remitting case to FTT for fresh hearing Whether at fresh hearing appellant can challenge findings in the first FTT decision against which HMRC did not appeal and the appellant did not cross-appeal.
The First-tier Tribunal (FTT) has dismissed a taxpayer's claim to deduct expenditure incurred renting a flat near the London theatre in which he was performing. The FTT found that the expenditure was incurred for the dual purpose of enabling him to perform his duties as an actor and to receive visitors in London and as the latter of these was a non business purpose and there was no identifiable part or proportion of the expenditure incurred wholly and exclusively for the purposes of the trade the whole expense was disallowable.
Mr Healy (the appellant) was an actor with his home in Cheshire. He entered into a contract to appear in a musical in London and during this period stayed in rented accommodation in London at a cost of 32,503. The appellant claimed a deduction for the accommodation expenses in his self assessment tax return for the relevant period. The deduction was denied by HMRC on the basis that under the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 34(1)(a) the expenses were not incurred wholly and exclusively for the purposes of the appellant's profession. In a previous hearing the FTT found in favour of the appellant (Healy TAX[2012] TC 01940) and HMRC appealed to the Upper Tribunal (UT) on the basis that the FTT had erred in law in failing to consider if the appellant had a dual purpose in incurring the expenditure. The UT found that the FTT had failed to correctly apply the wholly and exclusively test properly and in doing so made an error of law. The UT set aside the FTT decision and remitted the case to the FTT for a fresh hearing (R & C Commrs v Healy TAX[2013] BTC 1,958).
In this fresh FTT hearing the FTT were satisfied that the expenditure on the accommodation was for the purpose of the appellant's trade as a self-employed actor, however based on the appellant's oral evidence, when the appellant entered into the tenancy agreement he was seeking to secure space for visitors as well as for himself and this was a factor when deciding to rent a three bedroom flat. The FTT considered that for the purposes of ITTOIA 2005, s. 34(1) this was an independent purpose and that the expenditure on the accommodation had a dual purpose of enabling the appellant to perform his acting duties as well as enabling him to host visitors in London and this latter purpose was not a business purpose.
The appellant argued that if it was found that the expenditure had a dual purpose, a proportion of the expenses should be allowed under ITTOIA 2005, s. 34(2) as determined by the tribunal on a just and reasonable basis. The FTT noted that it had no general jurisdiction to reach decisions on what was just and reasonable, but instead had to apply the law. The FTT were not persuaded that it had been established by the appellant that there was any identifiable part or identifiable proportion of the amount spent on the rent for the flat which was incurred wholly and exclusively for the purposes of the trade and therefore they could not allow a deduction under ITTOIA 2005, s. 34(2). The appeal was therefore dismissed in relation to the expenditure on the flat.
Although the UT's decision and both parties' arguments before the FTT concentrated on whether the expenditure should not be allowed because it had the dual purpose of meeting the appellant's ordinary needs for warmth and shelter, the FTT found that it was not necessary to reach a view on this because it had already decided that the expenditure had the dual purpose of providing accommodation space for the appellant to receive visitors.
The appellant had also claimed expenditure for subsistence and taxi fares in his tax return which HMRC found were not deductible. The earlier FTT decision had dismissed the appellant's appeal in respect of these costs and the appellant made no appeal against those findings, however in this hearing the appellant argued that because the UT found there to be an error in the way the earlier FTT had applied ITTOIA 2005, s. 34(1), then that error may had affected the earlier FTT decision in respect of the subsidence and taxi costs and the UT had not specified that it was only setting aside the earlier FTT decision only in relation to the accommodation expenses. HMRC submitted that because the appellant did not appeal against those findings in the earlier FTT decision, those findings were now res judicata. The FTT agreed with HMRC and found that it was necessarily implicit that the UT only set aside the original FTT decision in respect of accommodation expenses. The FTT therefore did not consider the claims for expenditure on subsistence and taxi fares.
When the UT remitted this case back the FTT for a fresh hearing it appeared that the decision would be based on whether the accommodation Mr Healy rented had the dual purpose of providing for his ordinary needs of warmth and shelter and if this was affected by whether at the outset he viewed the assignment as short or long term, but in fact the decision was based on the dual purpose of the flat also providing Mr Healy with suitable accommodation to host visitors.
[1] The Appellant is an actor. His home is in Cheshire. During tax year 200506, he performed in a musical in London. In his 200506 self-assessment tax return, he claimed expenditure of 32,503 for the rent of a flat near the theatre in London where he was performing, expenditure of 4,094 for subsistence, and expenditure of 4,080 for taxi fares. An HMRC enquiry into his self-assessment resulted in a closure notice dated 27 October 2009 finding that none of these three items was deductible by virtue of s 34(1)(a) Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
[2] The Appellant appealed against that closure notice to the Tribunal. In a decision released on 30 March 2012 (Healy TAX[2012] TC 01940), the Tribunal allowed the appeal in relation to the claimed expenses for accommodation, but dismissed the appeal in relation to the claimed expenses for subsistence and taxi fares.
[3] HMRC appealed against that decision to the Upper Tribunal, contending that the First-tier Tribunal erred in law in concluding that the accommodation expenditure was deductible under s 34(1)(a) ITTOIA. In a decision released on 25 July 2013 (R & C Commrs v Healy TAX[2013] BTC 1,958 (the Upper Tribunal's decision)), the Upper Tribunal allowed the HMRC appeal, set aside the decision of the First-tier Tribunal, and remitted the case to the First-tier Tribunal for a fresh hearing which applies the correct legal principles as identified by the Upper Tribunal in its decision. Consequently, this appeal came before the present Tribunal to undertake that fresh hearing.
[4] The parties have not disputed the following basic facts set out in the Upper Tribunal's decision at [14][16], which the Tribunal finds on the evidence to be established:
[14] Mr Healy is a professional actor. He is well known for parts which have involved use of his Geordie accent. He has appeared in long running television series. His home is in Cheshire, where he has lived since 2001.
[15] Mr Healy entered into a contract dated 9 December 2004 to appear in Billy Elliot the Musical. The initial period of engagement was from 13 December 2004 to 17 September 2005, including a rehearsal period from 13 December 2004 until 24 March 2005 when live performances started.
[16] During the rehearsal period, Mr Healy stayed with a friend of his rent-free in London from 13 December 2004 until 15 April 2005. On 15 April 2005, Mr Healy entered into a tenancy agreement to rent a flat just over a mile from the theatre, for a fixed term of 52 weeks, at a rent of 875 per week.
Mr Healy paid the council tax demand which was sent to him at another property. He claimed a total of 32,503 for accommodation expenses in 2005/6. This expenditure covered the 36 week period in which Mr Healy was performing at the Victoria Palace Theatre, rather than for the full twelve month period of the tenancy agreement.
[5] Section 34 ITTOIA provides:
(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.
[6] The Upper Tribunal's decision at [31][65] contains a detailed review of the relevant authorities, and at [66] summarises the principles that they establish:
1) The exclusively limb of the wholly and exclusively test entails examining whether the expenditure in question has a dual purpose. If the expenditure is not solely for a business purpose it will not be deductible ;
2) Expenditure on items...
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Johnstone and Others
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