McLaren v Mumford (Inspector of Taxes)

JurisdictionEngland & Wales
Judgment Date19 July 1996
Date19 July 1996
CourtChancery Division

Chancery Division.

Rimer J.

McLaren
and
Mumford (HM Inspector of Taxes)

Robert Grierson (instructed by AJ Bolton & Co, Epping) for the taxpayer.

Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.

The following cases were referred to in the judgment:

Mallalieu v Drummond (HMIT) ELRTAX[1983] 2 AC 861; [1983] BTC 380

Mason v Tyson (HMIT)TAX (1980) 53 TC 333

Russell v Town and County BankELR (1988) 13 AC 418

Watkis (HMIT) v Ashford Sparkes & Harward WLRTAX[1985] 1 WLR 994; [1985] BTC 391

Wildbore v Luker (HMIT)TAX (1951) 33 TC 46

Income tax - Income and Corporation Taxes Act 1988Sch. D - Deductions from profits of trade - Whether total expenditure on rent, electricity, gas etc. by publican living on the premises was deductible as expenditure wholly and exclusively laid out for the purposes of the trade - Income and Corporation Taxes Act 1988 section 74 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 74(1)(a).

This was an appeal by a taxpayer from a decision of the general commissioners for Hackney that the total amount of overheads of a public house, of which the taxpayer was the publican, could not be deducted from the profitsbecause the taxpayer lived above the public house.

In 1991 the taxpayer took the tenancy of a public house in Hackney from a brewery. The tenancy agreement obliged him to live on the premises which comprised the parts used for the sale of beer (and other products) and above accommodation for the taxpayer's private use. The accommodation consisted of a lounge, five bedrooms, a bathroom and kitchen. The lounge was used exclusively by a racing pigeon club. Only two of the bedrooms were used by the taxpayer and one of them was unusable because of the dilapidated state of the building. The kitchen had only a kettle and a sink apart from a freezer used to supplement that in the bar and was used mainly as an office. The taxpayer owned a house in Broadstairs which he visited regularly.

The taxpayer claimed that his total expenditure on rent, electricity, gas etc. was wholly and exclusively laid out for the purposes of the trade. It was not therefore excluded from deduction by theIncome and Corporation Taxes Act 1988 section 74 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 74(1)(a). He appealed to the general commissioners for Hackney against assessments toIncome and Corporation Taxes Act 1988Sch. D income tax in respect of his profits for the years ending 5 April 1992 to 5 April 1994 disallowing a proportion of the expenditure.

The commissioners found that, although the only conscious motive in the mind of the taxpayer when he signed the tenancy agreement was to provide himself with a trade, the purpose of the expenditure was also to provide him with private residential accommodation. Accordingly they held that the expenditure had a dual purpose and determined that an adjustment of one-sixth of the expenditure was appropriate to cover the private use of the premises.

The taxpayer appealed on the grounds that since he was obliged by the tenancy agreement to reside on the premises, it was unfair to disallow any of the expenditure, particularly as he already had his own house in Broadstairs which he visited regularly.

Held, dismissing the taxpayer's appeal:

The fact that the taxpayer's only conscious motive in signing the tenancy agreement was to provide himself with a trade to earn his living was irrelevant. The expenditure in question had a dual purpose, both private and business. The private element of his expenditure was not incurred for the purpose of earning the receipts of the taxpayer's business, but served the non-business purpose of satisfying his ordinary human needs. Therefore it was disqualified from being deducted.

CASE STATED

1. At a meeting of the commissioners for the general purposes of the income tax for the division of Hackney held on 2 February 1995 Alexander William McLaren ("the taxpayer") appealed against the assessments set out below.

  1. (a) Estimated assessments to Income and Corporation Taxes Act 1988Sch. D, Case I income tax in respect of the taxpayer's profits from his trade as a publican for the following years ending:

  2. (b) 5 April 1992, estimated £ 9000

  3. (c) 5 April 1993, estimated £12,000

  4. (d) 5 April 1994, estimated £14,500

  5. (e) Estimated assessments to Class 4 national insurance contributions in respect of the taxpayer's profits from his trade as a publican for the following years ending:

  6. (f) 5 April 1992, estimated £ 9000

  7. (g) 5 April 1993, estimated £12,000

  8. (h) 5 April 1994, estimated £14,500

2. Shortly stated the questions for determination were:

  1. (a) Whether the taxpayer's expenditures on rent, rates, lighting, heating and insurance (in respect of the public house premises tenanted by him) in the two accounting periods from 18 July 1991 to 31 July 1992 and 1 August 1992 to 13 August 1993 were moneys wholly and exclusively laid out or expended for the purposes of his trade or alternatively whether these moneys fell within the Income and Corporation Taxes Act 1988 section 74 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 74(1)(a) ("ICTA" 1988) as sums (not having been wholly and exclusively laid out or expended for the purposes of the taxpayer's trade as a publican) which could not be deducted in computing the amount of the taxpayer's profits or gains to be charged to income tax under Income and Corporation Taxes Act 1988Sch D, Case I in the relevant years of assessment.

  2. (b) Whether (if the commissioners held that the taxpayer's expenditures on the items referred to in (a) above were not moneys wholly and exclusively laid out or expended for the purposes of his trade and as such fell within Income and Corporation Taxes Act 1988 section 74 subsec-or-para (1)ICTA 1988, s. 74(1)(a) as sums which could not be deducted in full in computing the profits of his trade) that portion of the rent paid in respect of that part of the taxpayer's premises used for the purposes of his trade as a publican could be deducted having regard to the provisions contained in Income and Corporation Taxes Act 1988 section 74 subsec-or-para (1)ICTA 1988, s. 74(1)(c).

3. The taxpayer was represented by his accountant Mr G Lee of Messrs Stonehills and gave evidence on his own behalf. The Inspector appeared in person.

4. [Paragraph 4 listed the documents proved or admitted before the commissioners.]

5. As a result of the evidence both oral and documentary the commissioners found the following facts proved or admitted:

  1. (2) The taxpayer entered into a tenancy agreement with Shepherd Neame Ltd ("the Brewery") on 18 July 1991 by which he became tenant of a public house known as the Duke of Marlborough situated in London E8. The only conscious motive in his mind when he entered into the tenancy agreement was to provide himself with a trade to earn his living.

  2. (3) The taxpayer carried on his trade as publican of the Duke of Marlborough from 18 July 1991 to 13 August 1993 and was correctly assessed under Income and Corporation Taxes Act 1988Sch. D, Case I in respect of his profits from that trade.

  3. (4) The premises let under the tenancy agreement to the taxpayer ("the premises") comprised those parts used for the purposes of a public house for the retail sale of beer (and other products) and other accommodation available for the personal and private use of the taxpayer which comprised of a lounge, five bedrooms, a kitchen and a toilet/bathroom.

  4. (5) The lounge, which was unfurnished and equipped by the taxpayer with items of furniture from his own house in Broadstairs, Kent, and his partner's home, was used exclusively by the Hackney and Kingsland Pigeon Club, which kept its equipment (eg. 100 clocks for racing) there and met there up to three times a week on Wednesdays, Thursdays and Fridays. Members often stayed until 3 am awaiting the return of their birds. Of the five bedrooms only two were used, one by the taxpayer and his partner and one by his partner's sons when they stayed on the premises. One bedroom was unusable because of a crack in the wall and rain entering from the defective roof. The kitchen contained a freezer used to supplement the bar freezer. The cooking equipment did not work and there was no fridge. The sink and the kettle were used and the room was used basically as an office. There was no central heating; there was a gas fire in the lounge and heating was supplied by calor gas heaters. There were separate electricity meters for the residential accommodation and public house rooms.

  5. (6) The only access to the residential accommodation was via the public house main entrance and a wicket gate in the yard.

  6. (7) The taxpayer's partner resided with him on the premises for approximately 14 months and her sons, aged approximately 17 and 20 years old, stayed there on odd occasions, usually for two or three days at a time.

  7. (8) The taxpayer owned, and still owns, a property in Broadstairs, bought in 1980, which on occasion he visited to collect mail and ensure it was in order and at which he stayed if it was too late to return to London. In his absence from the public house premises his sister or nephew would stay at the public house and look after matters. The taxpayer's mother cleaned the premises when the partner was not there.

  8. (9) The taxpayer's partner worked in the public house, together with casual employees and sometimes her sons.

  9. (10) The tenancy agreement required the taxpayer to reside on the premises at all times.

  10. (11) The taxpayer did not enter into negotiations with the brewery about the rent payable in respect of the premises prior to signing the tenancy agreement. The taxpayer had accepted the terms offered by the brewery because he was unemployed, knew the area and believed he could make a success of the venture.

  11. (12) In some instances the rent charged by a brewery for tied premises appears to be calculated by reference to its turnover and/or barrelage.

6. It was contended on behalf...

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