FTT Decision: ‘Kunjuring’ up the right result?
Justine Riccomini explains how a mature student was able to claim a deduction on living accommodation expenses which ostensibly failed the “wholly, exclusively and necessarily” test at s. 336 ITEPA 2003.
An interesting case came out of the Tax Chamber last October which concerns itself with the nature of expenses claims incurred whilst in employment and whether they are ultimately tax-deductible or not.
The decision, issued from the First Tier Tribunal (FTT) in October 2021, reminds us that the qualifying criteria for employment-related expenses are that the expense must be wholly, exclusively and necessarily” incurred in the proper performance of the employee’s duties, in accordance with section 336 ITEPA 2003. In this case, the employee was able to obtain tax relief for part of the accommodation costs he had incurred in south London, which is an extremely unusual outcome and based on a specific fact pattern.
To fulfil his ambition to become a maxillofacial surgeon, Mr Kunjur needed to undertake a four-year full-time training contract. Having located a suitable contract in south London, Mr Kunjur, who was a dental surgeon residing in Southampton with his family, accepted the post, which was the only one available at that time. The contract also required Mr Kunjur to carry out occasional duties at another nearby south London hospital, as well as regular night duties, and to be within 30 minutes of the hospital if on call.
Mr Kunjur was faced with a daily commute to south London from Southampton and it soon became clear that the travelling time extended his day in such a way as to make it untenable, when added to the pressure of the work, the training and the night duty element of the role. Mr Kunjur was concerned that he might not be able to discharge his duties properly, which may lead to undesirable outcomes, such as a negligence claim from a patient.
Even though the possibility of employer-funded hospital accommodation and self-funded ad-hoc hotel accommodation might have been options, Mr Kunjur decided that the best option for him personally as a mature student was to take a modestly priced apartment nearby, where he could leave his belongings and study materials, and be alone to study in peace from Monday to Friday. He returned home at the weekends.
Mr Kunjur made a claim for a deduction on his tax return relating to the living accommodation expenses (note that his travelling expenses would not have qualified due to the permanent workplace rules) and this was denied by HMRC, who also imposed a penalty for negligent completion of a tax return.
Square peg, round hole
Despite HMRC’s plea that none of the tests (that the employee incurred the expenses “wholly, exclusively and necessarily” incurred in the proper performance of his duties and that he was obliged to incur and pay them), the FTT concluded that Mr Kunjur was on call during his training contract and thus was required to live at or near the hospital.
The strict term “wholly, exclusively and necessarily” was discussed many years ago, in Lomax (HMIT) v Newton (1953) 34 TC 558, when Vaisey J commented:
‘An expenditure may be ‘necessary’ for the holder of an office without being necessary to him in the performance of the duties of that office; it may be necessary in the performance of those duties without being exclusively referable to those duties; it may perhaps be both necessarily and exclusively, but still not wholly so referable. The words are indeed stringent and exacting; compliance with each and every one of them is obligatory if the benefit of the Rule is to be claimed successfully.’
The decisions made by the FTT are unusual in the context of the “wholly, exclusively and necessarily” requirements. The wholly and exclusively tests would appear not to have been met by virtue of Mr Kunjur having decided independently of the hospital that he would rent an apartment in Collier’s Wood, which was not an objective requirement of his work, but a personal choice which put him in a position to carry out his duties. There was a requirement by his employer to be on call and to be within 30 minutes of the hospital during those times, but Mr Kunjur had initially tried to carry out the role by remaining in his home in Southampton, and renting that particular flat in that particular location was not the thing which enabled him to actually carry out those duties day to day.
The FTT nevertheless considered that although Mr Kunjur’s use of the flat had some mixed-use purpose to it (which fails the wholly and exclusively tests), the primary purpose was work and study related – which together were deemed to be ‘in performance of’ his employment duties. His being on call whilst living in the flat influenced their decision heavily, as did the fact that members of his family did not visit the premises whenever he was staying there or at weekends for the duration of the lease.
However, the fact remains that the premises could have been used for a private purpose to a much greater extent if Mr Kunjur had been so inclined, because the property was let exclusively to Mr Kunjur and was thus available to him to use privately, whether he did or not.
The Tribunal also unusually chose to examine the scenario for a self-employed person – possibly influenced by the fact that Mr Kunjur had paid away the costs of the living accommodation himself and was claiming tax relief on them. The legislation at Income Tax (Trading & Other Income) Act 2005 allows for an apportionment to be made between private and business expenses. It appears that the FTT went on to direct HMRC and Mr Kunjur to decide between themselves on how the private use apportionment of the costs should be sensibly worked out on the basis of this legislation, which is nothing to do with employment tax legislation (under which Mr Kunjur’s student contract could be said to be governed).
The Tribunal also considered that the penalties should be wholly dismissed because the taxpayer had relied upon his accountants to get his tax return right – which is probably the right outcome, and several other case decisions have reached the same conclusion, because Mr Kunjur’s claim was made on the basis of advice received from his accountants and completed by them.
Was the right decision reached here?
In an employment tax related case it is not usually the Tax Tribunal’s practice to consider non-employment tax related tax legislation, as happened with the expenses here. It may well have seemed equitable to allow for part of the expenses because Mr Kunjur carried out some of the work he was contracted to do at the flat, but the fact remains that the expenses were not “wholly, exclusively and necessarily” incurred under the strict employment tax tests set down in law under Section 62 of ITEPA 2003.
This is a surprising outcome which it may not be advisable to place heavy reliance upon – and in any case, the fact it is an FTT decision means it has not set any precedents. It may be likely that HMRC will allow it to go unchallenged due to the small amount the taxpayer is due to receive back, without bothering to appeal: but on the other hand, they may consider that if a substantial amount of similar claims are likely to be made by other taxpayers on their tax returns as a result of this decision, they may consider it necessary to attempt to have that decision overturned, as a deterrent.