Tax Relief on Travel and Subsistence Explained.
A brief look at potential problems (and solutions) for Umbrella Contractors who want to explore tax relief on business travel and subsistence expenses.
Tax relief on travel & subsistence expenses has been the cause of a great deal of debate and changing regulation in recent years, with the courts drawing some very fine lines as to what qualifies and what does not. The following information should be useful in trying to navigate those lines:
The ‘wholly and exclusively’ Test
The main test for assessing if business expenses are allowable for the purpose of tax relief is set out in the Income Tax (Trading and Other Income) Act 2005 which states that relief will not be given for ‘expenses not incurred wholly and exclusively for the purposes of the trade. It does however, allow for any clearly identifiable proportion of any expense that is so incurred.
Consider the example of a retail premises with a flat above the shop that the shopkeeper occupies. The costs of various utilities – electric, heating, gas, insurance and repairs – will be shared both by the business and by the private individual and it is still possible for that individual to reasonably apportion many of those costs to either their business or to their private life. For HMRC and the courts however if any costs have a dual purpose there can be no relief at all – and there have been a number of cases through the courts that back this up:
Mallalieu v Drummond
The most famous is the case of Mallalieu v Drummond (1983) which was about a barrister who claimed back the cost of her black clothing which could be used for court wear. The judgement went against her, with the court noting that while her motive in purchasing the black clothing may have been for the purposes of business, she would also have had her own unconscious motives that would meet her personal needs of ‘warmth and decency’ and therefore she had a dual purpose. The rule is that if the sole purpose of the expense is a business purpose then it is allowed, even if there is an incidental benefit. Under Bentleys Stokes & Lowless v Beeson (1952), for example, the cost of business lunches for clients was allowed because the sole purpose of the lunches was business and an important part of the running of their solicitors firm. The difference between the two cases is very fine, but the courts make a distinction based on both conscious motives and on unconscious motives which may give an incidental benefit.
Healy v HMRC
The case of Tim Healy (Healy v HMRC 2015) is a classic case of fine (ultra-thin) lines being drawn. Tim Healy was an actor appearing in Billy Elliot from April through December 2005 in the Victoria Palace in London. His home was in Cheshire and he went back there every weekend. He also rented a flat near the theatre for the duration of his employment in London and claimed back the cost of rental (£32,000 approximately.) He argued that he was classified as an itinerant worker since he was appearing in a number of productions both in the UK and abroad at the same time as he was in Billy Elliot. He was allowed the accommodation costs of the flat when it went to First Tier Tribunal although they did not allow any travel and subsistence costs at the flat or within London, but noted that had he been in a hotel he might have been allowed reasonable food and drink expenses.
HMRC then took the case to an Upper Tribunal who outlined a number of principles and sent it back to the First Tribunal to re-look at Healy’s motives. They then found out that he had actually rented a 3 bedroom flat so that his friends and family could come and stay with him, which consequently was ruled to be a dual purpose use for both business and private (the receiving of visitors in a private capacity.) They ruled that the private purpose was not incidental and that the expenses could not be apportioned and consequently no rental costs were claimable. In the end, had Healy actually stayed in the more expensive option – a hotel – he would have been able to claim a higher figure than the disallowed rental costs!
Samadian v CRC
Another important case that is worth looking at is Samadian v CRC (2014). In this case a Dr Samadian worked at two different NHS hospitals for an NHS trust. He also worked part-time for a private practice. There was an office at his house in which he did work-related admin but he did not have patients visit him there. He did however use consulting rooms at private hospitals to see patients and sometimes saw patients at their homes. HMRC accepted that the cost of his travel from home or hospital to see patients at home was claimable but they also said that the cost of travel from his house to the private hospitals or from the NHS to the private hospitals was not eligible for relief. That was because according to the First Tier Tribunal, Dr Samadian may have had a place of business at his home but his home was crucially not his business base. He had a number of places of business, only one of which was at his home.
The ‘Business Base.’
There have been numerous cases related to the notion of a business base when it comes to travel and subsistence expenses but there are two which relate specifically to the Samadian ruling:
Newsome v Robertson
Mr Newsome was a barrister who worked mostly at home but then claimed costs for his (occasional) travel between chambers and his home. In Newsome v Robertson (1952) Lord Denning ruled that Mr Newsome’s base was in fact his chambers and that because he lived quite a distance from that base for personal reasons, the cost of that travel was his choice and therefore not eligible for relief.
Horton v Young
In Horton v Young (1971) a bricklayer travelled every day between his home and any of the numerous building sites which he worked at (usually staying at one site for three weeks at a time.) His tools were kept at home and he did his books there and this qualified his home as his business base as far as the Court of Appeal was concerned, allowing him to claim the cost of travel to all of the building sites. How does this compare with Samadian? Samadian is difficult to square with this, because in that case there was no finding as to where his business base actually was, only that Dr Samadian actually had a number of different places of business, a slight but crucial difference. Nevertheless, when you examine Samadian, it is a very, very fine line. Dr Samadian did regularly book two consulting rooms at two different private hospitals for scheduled sessions but he did not have a specific business base at any of them and it is difficult to see how his home was not his business base! Regardless, as complicated and hair-splitting as it seems, that is currently the law and it has to be followed accordingly.
When it comes to subsistence costs the rules are currently defined by the Income Tax (Trading and Other Income) Act 2005 which sets out that reasonable subsistence costs while travelling as part of the course of trade are allowed so long as the travel costs themselves are also allowable. Alternatively, they are allowed if the trade happens to be ‘itinerant’ in nature or if the travel is not seen as a part of the trader’s regular travel pattern. Complicating matters is the fact that the courts have so far been reluctant to precisely define the meaning of ‘itinerant.’ Healy argued that he had an ‘itinerant’ profession but there was no finding on the matter. In Horton there was a finding that his profession was itinerant but this was one of the few cases where a finding was actually made and it remains the case that the legislation is still using terminology that has not yet been defined.
In conclusion, when looking at travel costs for self-employed workers it is necessary to assess firstly where their business base is and secondly whether any of the places they travel to from there could equally be seen as places of business and therefore affected by the same issues as those raised in the Samadian case. Further, it is essential that if any accommodation is leased on business for use as part of a long-term assignment then the clients sole motive in renting that accommodation must be a business motive. There must not be any dual purpose, (unconscious or otherwise) and the accommodation should only be adequate enough for the business purpose and nothing more. Hotel bills and reasonable subsistence are also likely to be allowable. Also worth bearing in mind is that if the client pays the self-employed worker’s accommodation, there will be no taxable receipt as a trader can only be taxable on sums received either as money or money’s worth and accommodation provision is neither of these. Owner managers of companies will be slightly better placed as they will benefit from being covered by the 24-month rule relating to travel and subsistence and the ‘temporary workplace.’