Revenue and Customs Commissioners v Healy
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 July 2013 |
| Neutral Citation | [2013] UKUT 337 (TCC) |
| Date | 25 July 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 337 (TCC).
Judge Timothy Herrington, Judge John Clark.
Oliver Conolly, Counsel, instructed by the General Counsel of Solicitor to HM Revenue and Customs, appeared for the Appellant, the Commissioners of Her Majesty's Revenue and Customs ("HMRC")
Dennis Wren, Tax Manager, Bowker Orford, Chartered Accountants appeared for the Respondent, Tim Healy ("Mr Healy")
Income tax - deductions for rent payable under tenancy agreement for a nine month period whilst actor appeared in stage production - were these wholly and exclusively incurred for the purposes of his profession - incorrect test applied by First-tier Tribunal - case remitted.
The Upper Tribunal has set aside the decision of the First-tier Tribunal in HealyTAX[2012] TC 01940. The First-tier Tribunal failed to apply the wholly and exclusively test properly with regard to the deductibility of accommodation costs and in so doing made an error of law. The case is remitted to the FTT for a fresh hearing.
Mr Healy (the Appellant) is an actor resident 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 the expenses were not incurred wholly and exclusively for the purposes of the Appellant's profession (ITTOIA 2005, Income Tax (Trading and Other Income) Act 2005 section 34 subsec-or-para 1s. 34(1)(a)). The First-tier Tribunal (FTT) found in favour of the Appellant (HealyTAX[2012] TC 01940) and HMRC appealed to the Upper Tribunal on the basis that the FTT had erred in law in falling to consider if the Appellant had a dual purpose in incurring the expenditure.
The Upper Tribunal found that the FTT had failed to apply the wholly and exclusively test properly and in so doing had made an error of law. The correct approach to the wholly and exclusively test was to consider it by reference to the dual purpose test: was the Appellant's sole purpose in incurring the expenditure in order to carry on his profession as an actor? To determine this, the FTT needed to establish if the effect of his taking the property, namely of providing him with warmth, shelter and comfort, was merely incidental to that purpose or was a shared purpose. The FTT did not approach the wholly and exclusive test in this way, instead focusing on the issue as to whether the Appellant was seeking a home in London.
It then fell to the Upper Tribunal to determine if the FTT's decision should be set aside, with the case returning to the FTT for a fresh hearing, or if the appeal could be allowed. Counsel for HMRC argued that the length of time for which the property was rented, nine months, meant that the Appellant must have had the purpose of providing warmth, and shelter. The Upper Tribunal rejected this argument, finding that there was no hard and fast rule as to when the length of occupation clearly tips the balance in favour of the conclusion that there is a dual purpose. The matter could be resolved only by reference to the subjective purpose of the Appellant when he entered into the rental agreement and so it was necessary for the case to be remitted to the FTT.
This is an interesting case, and not just because it involves a well-known celebrity. Many professionals and traders incur accommodation costs when working away from home. Some, like Mr Healy, will make the decision to rent a property rather than use a hotel room. For HMRC, the fact that the property was rented for nine months meant that there was clearly a dual purpose. Taxpayers will be encouraged that this argument was rejected by the Upper Tribunal.
Although the Upper Tribunal found that the length of occupation can have a bearing on the issue ("the longer the period of time the accommodation in question is occupied the more likely it is that the private purpose will predominate") it concluded that the matter could be decided only by reference to what was in Mr Healy's mind when he entered into the tenancy agreement. As Mr Healy did not appear before the Upper Tribunal, the task of establishing this falls to the First-tier Tribunal.
For commentary on the wholly and exclusively rule, see the CCH Tax Reporter at 208-000ff.
[1]This is HMRC's appeal from a decision of the First-tier Tribunal (Tax Chamber) (the "FTT") allowing Mr Healy's appeal against a decision of HMRC made following an enquiry into Mr Healy's self assessment of tax for the year 2005-06 ("the Decision").
[2]Specifically, HMRC's decision was that Mr Healy was not entitled under Income Tax (Trading and Other Income) Act 2005 section 34 subsec-or-para 1section 34(1)(a) of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA") to deduct certain expenses relating to accommodation in the sum of £32,503 which had been included in his self assessment. The appeal before the FTT also related to certain expenses for subsistence and taxi fares. Mr Healy's appeal was dismissed in relation to those expenses and he did not pursue those claims any further.
[3]Mr Healy contends, as was found by the FTT, that the accommodation expenses, representing the rent payable under a tenancy agreement for a period of nine months whilst Mr Healy was appearing in stage production in London, were incurred wholly and exclusively by Mr Healy for the purposes of his profession.
[4]HMRC contend that the FTT erred in law in failing to consider, or consider properly, whether Mr Healy had a dual purpose in incurring the expenditure in question, namely to meet his ordinary needs for warmth and shelter as well as his stated business purpose. They contend that had the FTT applied the correct test plainly it would have found that such needs were included amongst the purposes of the expenditure and accordingly the appeal should be simply allowed rather than remitted to the FTT to be decided again.
[5]The parties were notified on 17 September 2012 that this appeal had been listed for hearing on 25 and 26 April 2013. HMRC then attempted to agree case management directions with Mr Healy's representatives, Bowker Orford, but received no response as a result of which HMRC submitted draft directions which the Upper Tribunal approved on 30 January 2013 (the "Directions"). Among other things, the Directions provided for skeleton arguments to be filed, HMRC to file by 11 April 2013 and Mr Healy no later than one week later.
[6]Bowker Orford continued to ignore communications sent by HMRC regarding compliance with the Directions, and in particular the provision by Bowker Orford of Mr Healy's list of documents. Consequently, after enquiries from the Tribunal, Bowker Orford stated in an email dated 6 March 2013 that they were still awaiting to hear from Mr Healy with his instructions as he had a concern that if HMRC were successful on the appeal he would potentially be liable for their costs, HMRC having declined to indicate that they would not seek to recover their costs if successful under the Rees Principle. It would appear that on 27 March 2013 HMRC provided Bowker Orford with details of their potential costs following which Bowker Orford received instructions to proceed with the appeal and instruct counsel.
[7]On 11 April 2013 HMRC served their skeleton argument but on the same day Bowker Orford applied for the hearing to be adjourned on the basis that they had only recently been instructed to progress with the appeal and there was insufficient time to instruct counsel to represent Mr Healy.
[8]This application, which was contested by HMRC, was refused on the papers on 15 April 2013 on the basis that no good reason was given for the delay in giving instructions to Bowker Orford and Bowker Orford had been slow and unresponsive in replying to communications from HMRC and the Tribunal.
[9]The application was renewed by Mr Wren at the outset of the hearing on 25 April 2013. Mr Wren explained that Mr Healy had delayed giving formal instructions to proceed after the hearing dates had been fixed because of his concerns about the costs implications and he then became engaged on other matters, including having to deal with his divorce. On 11 April Bowker Orford approached counsel to appear form Mr Healy but counsel indicated there was now insufficient time to prepare. Mr Wren regretted the lengthy indecision on Mr Healy's part and the failure to respond to communications between September 2012 and March 2013.
[10]After carefully considering the factors in favour of an adjournment, namely that the case raised an important point as to the extent to which accommodation costs could properly be deductible for income tax purposes and that it would therefore be highly desirable for the Tribunal to hear detailed argument from both parties on the issue, we dismissed the application.
[11]In our view the application disclosed no good reasons outside the control of Mr Healy or his advisers which would justify an adjournment; in particular no good reason was given why there was such a long delay in reaching a decision to proceed and why there had been no earlier communication with HMRC and the Tribunal on the issue. To adjourn the matter at such a late stage would cause a significant delay in finalising the matters and would be likely to result in an increase in HMRC's costs. We therefore concluded that it was in the interests of justice to proceed with the hearing.
[12]In the event, in the absence of counsel, Mr Wren listened to Mr Conolly's submissions and the discussion between Mr Conolly and the Tribunal and made some very helpful submissions of his own.
[13]The facts on the accommodation issue were not in dispute. They are set out in paragraphs 7 to 13 of the Decision and can be summarised as follows.
[14]Mr Healy...
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