For a' that, an' a' that – when can expenses common to us all, like food, drink and fitness, be tax deductible?
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
1 December 2020
For a' that, an' a' that – can expenses common to us all be tax deductible?
With Burns night fast approaching, it’s time to consider if expenses common to humanity can be tax deductible.
We all need food, drink, clothing, exercise, and HMRC’s objective has long been to show that there’s no tax deduction for simply being human. The main argument is along the lines of ‘a Man's a Man for a' that’ – if the expense is one common to humanity, don’t expect a deduction as a business expense.
Yet the Tribunals have thrown up some interesting examples recently. From a diver’s gym expenses to subcontractor’s travel and accommodation, the wholly and exclusively rule has re-surfaced with a few new twists.
100 years of ‘wholly and exclusively’
As the Tribunal noted recently, the phrase ‘wholly and exclusively’ has been with us for a long while. In its current iteration it appears in the general rule for expenses deductions for employees as well as in regard to trading expenses.
For employees though, the phrase in s336 Income Tax (Earnings and Pensions) Act 2003, includes some additional restrictions – that the employee is obliged to incur and pay it as holder of the employment, and that the amount is incurred ‘wholly, exclusively and necessarily’ in the performance of the duties of the employment.
With trading income for both income tax and corporation tax, mirrored wording makes ‘wholly and exclusively’ the primary hurdle which expenses have to pass to qualify as deductions against trading income (see s34 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and s54 Corporation Tax Act 2009).
Trading income
Looking at trading income in more detail, section 34 ITTOIA 2005 sets out the wholly and exclusively rule for the self-employed.
‘(1) In calculating the profits of a trade, no deduction is allowed for –
(a) expenses not incurred wholly and exclusively for the purposes of the trade, or
(b) losses not connected with or arising out of the trade.
(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.’
Dual purpose versus apportionable expenses
Here is the common humanity theme again. Where there is no identifiable business part or proportion to an expense, then it is either fully allowable, where the non-business element is ‘incidental’, or fully disallowable, if the non-business element is more than trivial. These are the dreaded ‘dual purpose’ expenses.
The logic is summed up in the well-known case of Caillebotte v Quinn [1975] 50 TC 22 – the carpenter who needed a larger lunch, due to manual work. Mr Quinn could not deduct the cost of lunches, because there was no identifiable business proportion and he ‘ate his meal not because he was a carpenter but because he was a human being’.
It was common to all humanity to need food, and not specific to carpenters.
Diving and the gym
Move on to 2020 and the argument resurfaces with a saturation diver and gym expenses (see Robert Osborne TC07851 [2020] UKFTT 0373 (TC)). Surely someone’s state of fitness is similarly just a feature common to all humanity? How can it be a business expense?
Yet the Tribunal decided that this was a business expense, and the travel related to it.
Mixed decisions
Previous decisions here have been mixed. Consider the draughtsman / guitarist with an injured finger – where the court held that the medical expense was dual purpose as he played guitar both as a hobby and as a profession (Prince v Mapp ([1970] 1 All ER 519).
Or the stunt man with a damaged knee, who was allowed medical and other expenses, but not the gym training to go with it (David Parsons TC00421 [2010] UKFTT 110 (TC)).
Diving success
So how did a saturation diver win?
The first point is technical. These are special rules for divers who are employees. Section 15 ITTOIA 2005 deems that certain diving activities undertaken in the ‘performance of the duties of employment’ in the United Kingdom or Continental Shelf, are to be taxed as self-employment.
Hence the expenses rule is that for trading - ‘wholly and exclusively’ - rather than the more restrictive (‘necessarily’) employee rule mentioned above.
The question of duality – all or nothing
The second point is that HMRC was rescinding from a 2009 semi-official agreement which allowed a deduction for a proportion of gym and dental costs. This compromise arrangement was published in Taxation magazine in 2010 (page 19, 20 May 2010 edition, in the ‘Feedback’ section) and permitted a sliding scale of percentage deduction based on age of the diver.
Now HMRC was drawing the line more clearly. It held that gym expenses are intrinsically dual purpose, so allowing a percentage isn’t appropriate.
Having decided this, the ‘all or nothing’ approach applies. HMRC opted for ‘nothing’. But the Tribunal, after careful consideration of the facts, opted for ‘all’.
Dictated by the occupation
Saturation diving is dangerous and inordinately challenging in terms of fitness. Divers have no ordinary fitness regime. The diver has to pass medical tests before securing work and must be able to live for days, even weeks, in compressed chambers of diving vessels or working at depths of 150m in the North Sea.
Mr Osborne’s gym training was not undertaken just to be physically fit to work. It was also intended to minimise further skeletal damage and prolong his career as a diver for as long as possible.
The Tribunal pointed out that the legal test for expenses includes the word ‘exclusively’: this is markedly different from ‘necessarily’. There was an element of choice. HMRC’s argument included the view that a diver had discretion over how to train.
But Tribunal decided that this wasn’t relevant. The exact format of training needed for the job was not specified It might strictly not be ‘necessary’ to undertake it in exactly the manner a specific taxpayer chose, but it could, nevertheless be ‘exclusively’ for the business. Furthermore ‘an incidental or unavoidable private advantage’ would not prevent a claim.
On the facts before them, the Tribunal decided that the gym expenses, and the related travel, were deductible as ‘wholly and exclusively’ work expenses.
Conclusion
It could be claimed that tax is one of the great levellers of life. But perhaps its best to let Burns have the last word.
For a' that, an' a' that.
Our toils obscure an' a' that,
The rank is but the guinea's stamp,
The Man's the gowd for a' that