Income tax – Deductible expenditure – Rent – Respondent doctor claiming tax relief in respect of rent for living accommodation near hospital – Appellant commissioners refusing relief – First-tier tribunal deciding respondent entitled to relief for proportion of expenditure – Appellants appealing – Whether respondent obliged to incur expenses as holder of employment – Whether expense incurred wholly, exclusively and necessarily in performance of duties – Appeal allowed
During the tax years 2012-13 to 2016-17, the respondent was a junior doctor working at St George’s Hospital, Tooting. His family home was in Southampton, where he lived with his wife and children.
Under section 336(1) of the Income Tax (Earnings and Pensions) Act 2003, a deduction from earnings was allowed for an amount if the employee was obliged to incur and pay it as holder of the employment; and the amount was incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
An issue arose concerning expenditure which the respondent incurred on living accommodation which he rented in Colliers Wood, near to the hospital. The appellant claimed the rent was deductible pursuant to section 336(1) of the 2003 Act for the relevant tax years. The appellant commissioners disagreed, and assessments were raised accordingly. The respondent appealed to the First-tier Tribunal (FTT).
The FTT concluded that the expression “wholly and exclusively” was used in the computation of business profits in which context relief was allowed for a proportion of an item of expenditure that was, in fact, used for business purposes. There was no reason to adopt a different approach in the context of section 336 of the 2003 Act. The respondent was entitled to relief for a proportion of the expenditure by reference to the amount of time he spent at the premises performing some of the duties of his employment. The appellants appealed.
Held: The appeal was allowed.
(1) The FTT was wrong to suggest the test of whether an employee was obliged to incur the expenditure as holder of the employment might be a subjective test. There was no distinction between offices and employments in that regard.
The test was objective and distinguished between expenses which arose from the nature of the office and those which arose from the personal choice of the taxpayer. But that did not mean no expenses could ever be deductible unless precisely those expenses had necessarily to be incurred by each and every office holder. The objective character of the deductions allowed related to their nature, not to their amount: Ricketts v Colquhoun 10 TC 118 and Owen v Pook [1970] AC 244 considered.
The FTT ought to have considered whether all doctors employed in the role for which the respondent was employed would be obliged to incur expenditure of that nature, or whether the rental of accommodation was a matter of personal choice for the respondent arising from his personal circumstances.
(2) While the FTT suggested the test for employees might be subjective, it appeared that it intended to apply the objective test. But it did not do so correctly. It was clear the reason the respondent had to incur the expenditure was not because he was obliged to do by reason of the nature of the employment. He did so because his family home was in Southampton. That was a matter of personal choice arising from his personal circumstances. Other employees in the same employment might live within 30 minutes of the hospital and would not be obliged to incur such expenditure. It was therefore irrelevant whether or not it was reasonable to expect the respondent to use other accommodation which was available to him, or to uproot his family: those were factors personal to the respondent. Therefore, the FTT erred in law in finding that the respondent was obliged to incur expenditure on the premises as holder of the employment.
(3) It was well-established that the words “wholly and exclusively” limited relief in respect of expenditure which served a dual purpose. No deduction was available where the expenditure was required for the performance of the duties but also served another, personal purpose: Hillyer v Leeke [1976] STC 490 considered.
In the present case, the FTT erred in law in finding that the expenditure could be apportioned to identify an amount which was incurred wholly and exclusively in the performance of the duties. The position was similar to relief for expenditure incurred by self-employed individuals.
The FTT did not suggest that it considered any personal advantage to the respondent to be merely an effect of the expenditure rather than the object of the expenditure, and in any event, that would not be an appropriate analysis on the facts. The respondent’s object was clearly to provide himself with living accommodation during his working week for both employment and personal purposes. Therefore, the FTT erred in law in finding that expenditure on the premises was “wholly and exclusively” incurred by the respondent in the performance of his duties: Mallalieu v Drummond [1983] STC 665 considered.
(4) The FTT found that when the respondent was on informal on-call giving advice over the telephone and when he carried out research which he was required to do as part of his employment, the premises were being used in the performance of his duties. Although the premises were being used while the respondent performed his duties, expenditure on the premises was not incurred in the performance of the duties. Rather, it was incidental expenditure which provided the respondent with accommodation from which he could, amongst other things, take calls and carry out research. It put him in a position to do the work he was employed to perform, but he did not incur the expenditure in the performance of the duties of his employment. Therefore, the FTT erred in law in finding that the expenditure on the premises was incurred by the respondent “in the performance of his duties”: Nolder v Walters (1930) 15 TC 380, Elderkin v Hindmarsh [1988] STC 267 and Fitzpatrick v Inland Revenue Commissioners (No 2) [1994] STC 237 considered.
Accordingly, the respondent was not entitled to any deduction from his earnings for expenditure on the premises. The court would remake the decision and dismiss the respondent’s appeal against the assessments.
Marianne Tutin (instructed by the General Counsel and Solicitor for His Majesty’s Revenue and Customs) appeared for the appellant; The respondent did not appear and was not represented.
Eileen O’Grady, barrister
Click here to read a transcript of Commissioners of HM Revenue and Customs v Kunjur
