In Tim Healy v HMRC  TC04425 an actor was unsuccessful in claiming tax relief for renting a flat when working away from home. His admission that he wanted a spare room to accommodate potential guests meant that the expense was not "wholly and exclusively incurred" for the purpose of his business.
The First Tier tribunal's (FTT) decision does not rule out the fact that in other cases tax relief might be obtained for the cost of renting a flat, just as it can be obtained on the cost of a hotel or other accommodation.
The facts of the case were as follows:
- Mr Healy is an actor who is based in Cheshire. He was cast to play Billy Elliot's Dad in the West End musical.
- In the rehearsal period from December 2004 to March 2005, he stayed with friends in London.
- He rented a flat in London from March 2005 when the show went live.
- He had argued that he rented a flat because it was in his expense budget and it was cheaper than a hotel. He also needed somewhere to warm up his voice before shows and take vocal coaching.
- He rented a flat for a 12 month term, however it contained a six-month break clause. This tied in with his six month performance contract. After six months the rental contract could be terminated with two months' notice.
- The show was successful and his performance contract was extended for a further three months. He terminated the lease on the flat when he left the musical.
- Cheshire was his home and the base of his business operations: he did not intend London to be his home.
HMRC disallowed the rental cost on the basis that the rental term was for a year, maintaining that a taxpayer cannot obtain tax relief on rental accommodation because the costs of living are private costs.
The case had been heard by the FTT in 2012 which had decided in the actor's favour. HMRC had appealed to the Upper Tribunal (UT) in 2013 on the basis that the FTT had misinterpreted the law and not applied the correct tests. The UT sent it back for a rehearing to the FTT.
Mr Healy did not attend the first FTT hearing, or the UT hearing. His accountant had also in error advised the UT that his rental agreement contained a two week break clause throughout. This point was cleared up at the second FTT hearing.
It was reheard by the FTT in 2014 and Mr Healy attended this hearing. The decision was published in June 2015.
Section 34 of the Income Tax (Trading and Other Income) Act 2005 provides that:
Expenses not wholly and exclusively for trade and unconnected losses
(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.
The FTT, following the directions of the UT, was required to consider the Appellant’s motives at the time that he entered into the tenancy agreement. In short; was the expenditure on the flat incurred wholly and exclusively for the purposes of the trade, or, if not was it possible to allow relief for any identifiable part or identifiable proportion of the expense?
The UT had already set out some important points:
- "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."
The rehearing of the case proceeded on an optimistic note for the appellant. However in his oral evidence, Mr Healy, having confirmed the flat had three bedrooms, said he knew “how massive the show would be” and that he “needed space” for people who would want to come to visit.
Whilst it was clear to the tribunal that he needed to be in London for his work, the FTT found that there was a fatal duality of purpose. The taxpayer's intentions were twofold: he wanted somewhere to stay whilst on business but he was also seeking to secure space for visitors as well as for himself, and that this was his main consideration when deciding which particular flat to rent. As accommodating friends and family was not a business purpose, the fact that the three bedroom flat cost no more than a hotel was not material to the conclusion. There was duality of purpose and his claim failed.
The tribunal then considered whether it was possible to apportion the expense. It had been suggested that apportionment could be in term of the number of rooms or floor space. However the tribunal rejected this idea because Mr Healy's guests would also be using the other rooms in the flat.
Other matters: procedure and subsistence
It had been argued that since the UT had sent the case back to the FTT for a rehearing, then all the points raised at the first hearing could also be reheard, including a matter not subject to any appeal after the first FTT hearing, namely was expenditure on subsistence allowable? The FTT rejected the argument for a rehearing of the point. At the first hearing of the FTT expenditure on subsistence was disallowed because no receipts retained to back up the expenditure.
Although the outcome is a huge disappointment for the taxpayer this case is highly significant for any self-employed taxpayers who stay away from home on business. Despite what HMRC tried to argue, the message that came down from the earlier UT hearing and is backed up by this deicision is pretty clear when it comes to accommodation costs. These costs may well be allowable, but the will be decided on a case-by-case basis, according to their facts. The law sets no limit as to how long one can be away from home to obtain tax relief. It may be one night, or as in this case even nine months. Mr Healy's admission that when choosing his accommodation, the consideration of chosing accommodation with the intention of having his guests to stay was the single factor that sealed his fate.
Hindsight is a wonderful thing: if he had chosen a flat with a single bedroom, the question of guests would not have arisen. Had he also retained receipts for his expenditure on subsistence, things might have gone in his favour.
The decision may be the subject of an appeal.
Case reference: Tim Healy v HMRC  UKFTT TC04425
First FTT hearing: T Healy v HMRC  UKFTT TC01940
Upper Tribunal: HMRC v Healy  UKUT 0337 (TCC)
Useful guides for the self employed:
What expenses can I claim? Accommodation costs
Subscriber guide with full analysis of the above decision, comparison of case law and guides to different costs (allowed and disallowed for tax).
What expenses can I claim? Subsistence
Subscriber guide with guides to different costs (allowed and disallowed for tax).
Useful guides for directors and employees (different rules than in the above case):
Accommodation costs: with travel and temporary workplaces
Subscriber guide to claiming tax relief on hotels, clubs and flats.
Case links: Healy v HMRC