Crackdown on duality of purpose – Tim Healy v HMRC

The decision in Tim Healy v HMRC [2015] TC04425 , published in June 2015  has shown how tax payers should demonstrate that their expenses are solely for the purpose of the trade.

The Claim

In this case, an actor failed in his claim for tax relief for renting a flat whilst working away from home. He inadvertently claimed the three bedroom flat was required not only required for business use, but to accommodate guests as well, which meant that the expense was not “wholly and exclusively incurred” for the purpose of his business.

In 2012 the case was heard by the First Tier Tribunal  and had decided in the actor’s favour. In 2013 HMRC appealed to the Upper Tribunal on the grounds that the law had been misinterpreted and the case was sent back to the First Tier Tribunal.

The Facts of the Case

The facts of the case were that Mr Healy was an actor based in Cheshire and was casted in a West End musical. When the show went live in March 2005 , he rented a flat in London as it was cheaper than renting a hotel.  The rent was for a 12 month contract with a 6 month break clause. He terminated the lease when he finished the musical contract.

HMRC disallowed the rental expenditure on the basis that the rental term was for a year, stating that a taxpayer cannot obtain tax relief on rental accommodation as the costs of living are private costs.

The Law

Section 34 of the Income Tax (Trading and Other Income) Act 2005 states that:

(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.

The First Tier Tribunal was required to consider Mr Healy’s intentions at the time that he entered into the tenancy agreement. In particular was the expenditure on the flat incurred wholly and exclusively for the purposes of the trade, or, if not was it possible to obtain tax relief for any identifiable part of the expense.

Upper Tribunal’s Findings

The Upper Tribunal had already stated

  • “Each case must be looked at on its own facts and we see no reason…why expenditure on rental accommodation is, except in special cases, in a different position to hotel or club accommodation, and
  • “There is no hard and fast rule as to when the length of the assignment clearly tips the balance in favour of a conclusion.”

Mr Healy’s Oral Evidence 

In his oral evidence Mr Healy stated that he knew he would have guests over as the show was going to be popular.  This showed a duality of purpose.

The Conclusion 

Mr Healy’s intentions were twofold: he had to stay somewhere for business and wanted to ensure there was enough accommodation for guests. The fact that it cost less than a hotel was not relevant. There was duality of purpose and his claim failed.

The tribunal did consider whether the expense could be apportioned, however this was rejected as no suitable measure could be used such as rooms, floor area, as the guests would be using the whole flat.

This case highlights that accommodation costs for the self employed are accessed on a case by case basis. Mr Healy himself dug a whole by stating extra rooms in the flat was one of the factors he was looking for when hunting for a flat. Had he chosen a single bedroom flat, the issue with guests would not have been raised in court.

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