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Contractor’s home to hotel travel disallowed

A Scottish contractor, who lodged in Swindon to be available for work in the south of England, had his travel and accommodation expenses disallowed as not wholly and exclusively incurred for his business.

23rd Nov 2020
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Hotel room travel expenses
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Taylor claimed the expenses between his home in Melrose, Scotland and a hotel in Swindon in his 2016/17 tax return.

HMRC opened an enquiry into Taylor’s 2016/17 return in April 2018 and requested a breakdown of Taylor’s expenses claims. In November 2018, HMRC issued a closure notice and a penalty notice for £1,015.96 and £1,115.35 respectively.

The closure notice disallowed much of the taxpayer’s expenses claims on the basis that they were not incurred wholly and exclusively for the purposes of his trade. The penalty was assessed based on careless behaviour.

Taylor appealed both the closure and penalty notices (TC07893).

Background

During the 2016/17 year, Taylor chose Swindon to be his base to undertake work at various sites as there was better pay on offer. In other words, Taylor lived in Melrose but chose to carry out his trade primarily at sites around Swindon.

As he was required to work long days, Taylor decided that he needed local accommodation, and chose something basic. He did not claim his evening meals as an expense. In 2016/17, he stayed in Swindon for 165 nights.

Taylor took advice prior to claiming the expenses in his tax return and believed the wholly and exclusively test had been met. There was no dual purpose for the accommodation, as he had only been in Swindon for work.

Wholly and exclusively

Broadly, under ITTOIA 2005 s 34, when calculating trading profits no deduction is allowed for expenses not incurred wholly and exclusively for the purposes of the trade. As a result, this case turned on whether the accommodation and travel expenses were wholly and exclusively incurred by Taylor for the purposes of his trade.

Taylor asserted that his situation paralleled that of the successful appeal in Horton v Young (1971) 47 TC 60. In that case, the taxpayer worked as a subcontractor bricklayer at various building sites within 55 miles of his home, worked at each site for around three weeks, wrote up his books and kept his tools at home, and travelled to the sites in his car.

HMRC argued that in contrast to Horton v Young, Taylor worked out of Swindon, not his home address in Melrose. As such, the travel and accommodation between Melrose and Swindon was not wholly and exclusively incurred per ITTOIA 2005, s 34. In this case, Taylor had simply chosen Swindon as a convenient base for his work at different sites.

Decision

The FTT agreed with HMRC’s interpretation: the main reasons Taylor chose to stay in Swindon were to improve his chances of obtaining better rates of remuneration and to reduce the journey time from his home in Melrose to his place(s) of work. 

As the FTT put it, it was not as if Taylor was unable to live and work in Melrose. His situation was little different from a taxpayer choosing to stay in a hotel closer to their workplace during the week so that they could spend longer at home, eg to help with childcare or to catch a later train, and then claiming those hotel expenses against their income.

The FTT found the facts of Horton v Young to also markedly differ from the facts of this case. In Horton, the taxpayer worked within a 55 mile radius from his actual home, and did not base himself in lodgings nearer his various places of work for his own convenience and improved remuneration.

Accordingly, the FTT found that the accommodation and travel expenses claimed did not meet the wholly and exclusively test, and so were not deductible. HMRC’s closure notice was to stand.

Penalty reduced to nil

Notwithstanding the above, the FTT did find HMRC’s penalty evaluation to be flawed.

The FTT felt that Taylor had acted on an innocently mistaken understanding of section 34 and had taken advice that was not “disqualified” per FA 2007, Sch 24 para 3A(4). Accordingly, the FTT found that the penalty rate should be reduced to 0%. 

However, the reduction of the penalty to nil did not comfort the taxpayer, as HMRC had already suspended the penalty by the time the appeal was heard.

Comment

HMRC did concede that if the taxpayer had travelled to Swindon for a specific contract, then his travel and accommodation costs for that contract would have been deductible. However, this is not what happened in this case.

Further guidance from HMRC on the deductibility of travel expenses is available in the Employment Income Manual para 31800.

Replies (25)

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By johnjenkins
23rd Nov 2020 09:44

This decision is absolute nonsense, although I understand the thinking behind it. Had work not been obtained in Swindon then those expenses would not have been incurred so they have been incurred wholly and exclusive for the business. You don't need previous court decisions that didn't relate to this case to show that. I do hope that this case goes further.

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By cereus77
23rd Nov 2020 09:56

.

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By tedbuck
23rd Nov 2020 10:00

I don't know that I agree with John Jenkins. It is difficult not to sympathise with HMRC as Taylor was effectively establishing a living space in Swindon rather like the MP's flat in town (different set orf rules for them of course,)

These questions are never easy but I think, in this case, HMRC were right.

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Replying to tedbuck:
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By johnjenkins
23rd Nov 2020 10:08

I do understand HMRC point, but the overriding factor is surely that if there wasn't any work in Swindon then there wouldn't be any expenses. Therefore the wholly and exclusive rule is right. From what I gather the only expenses claimed were those that enabled him to work. This is a bad decision and needs to be taken further.

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Replying to johnjenkins:
By cfield
23rd Nov 2020 10:14

I see what you're getting at John but in this case there was a duality of purpose. He turned it into a home. Hence, it was not exclusively for the purposes of the trade.

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Replying to cfield:
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By johnjenkins
23rd Nov 2020 10:37

Had he moved his family there I would agree. However this is a temporary work accommodation and as such is "wholly and exclusively" for work. No other reason.

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By cfield
23rd Nov 2020 10:11

The last paragraph under Comment is the most important part of this article for contractors and their accountants. HMRC conceded that travel and accommodation would have been deductible had it been a specific contract.

Hamish Taylor's mistake was to turn his digs into a home from home. He should have gone home after each individual contract, spaced them apart and kept his forays south shorter and much less frequent.

An even better solution would have been to work through a company and take advantage of the temporary workplace rules for employees. Again, he would have had to avoid turning Swindon into a home from home (HMRC specifically disallow pied-a-terres in Booklet 480) but he wouldn't have had to rely on Horton v Young or any other cases relevant to the self-employed.

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Replying to cfield:
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By johnjenkins
23rd Nov 2020 10:34

There you have it. If he done this or if he had done that. You cannot get away from the fact that the temporary accommodation was expended in order to do work, wholly and exclusively. Had Hamish moved his family in then I would agree with the decision. As I said I do hope this case goes further. It is not up to HMRC to adapt "wholly and exclusively" to their own interpretation.

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By memyself-eye
23rd Nov 2020 10:12

Glad I don't haver a contractor clients - trying to explain the subtle differences under the W&E test is nigh on impossible.

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By Mr J Andrews
23rd Nov 2020 10:38

There are several issues here. The first is that the Scottish contractor had been selected for a HMRC enquiry. By inference of the article, there is nothing demonstrably incorrect with the record keeping and income returned ; consequently the HMRC accounts investigator has gone for 'add backs'. There's nothing worse from a Revenue investigation perspective than coming away with no brownie points.
Whether right or wrong on the expenses disallowance which I'll come to soon, HMRC has also gone for penalties. Again another box ticker in the promotion ladder stakes . But good to see that the FTT [at least] decided that penal consequences were not appropriate. Sadly there are no statistics to reveal how many innocent taxpayers have been wrongly penalised by over zealous HMRC officers attempting to justify their existence by getting the monies in at whatever tactics. Well done Melrose Man for pursuing the matter.
Lucy concludes her article by referring to HMRC's internal guidelines at EIM para 31800. These are by definition - guidelines - and by fact , relating to Employment income. Melrose man is of course a self employed individual. HMRC tend to include 'NECESSARY' when it suits.
Sorry for the digression but here's the crunch. HMRC are neither guided by case law nor internal manual guidelines when it comes to determining what they feel should be allowable business expenditure for travel etc for the self employed. Over a decade ago , the HMRC Compliance Team in unison with National Project think tank boffins came up with how it should be. Initially attacking the medical profession with great success , any self employed individual is now open to this interpretation.
All practitioners should be made aware of this well hidden guide for accounts investigators . Have a look at the totally biased doctrine in the form of a Business Guidance Note . Just google HMRC BGN006/09 and see what I mean.

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Replying to Mr J Andrews:
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By ds
23rd Nov 2020 13:37

I'm reminded about the different treatment of expenses provided for our legislators in the house of commons and the level of travel expenses paid for in addition to their salary which is likely to increase to around £85k next year. They do not have to deduct travel expenses from their already generous pay and declare it on a self assessment form, but it is paid in addition to it. Ian Blackford, SNP MP for Skye claimed around £90k recently for his annual expenses much of it for travel and accommodation for having to visit Westminster to sit and talk.

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Replying to ds:
By cfield
23rd Nov 2020 13:44

Yes, one law for them, another for the rest of us. Doesn't change anything about this case. Let's just make the best of the laws we've got and work round them..

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By bassanclan
23rd Nov 2020 10:49

HMRC are presumably delighted he travel each day and claim his 45/25p per mile every day instead!
It may be impractical in this instance, but I imagine if it was say under 100 miles each way clients will keep quiet about their digs and put forward a mileage expense instead.

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By Angela Spencer
23rd Nov 2020 11:08

As I read it, Taylor took himself to Swindon, and then sought different contracts from that location.
The more usual approach is that a contractor first gets a contract away from home, then seeks accommodation near to that contract, for the duration of that contract.
Hence the accommodation is seen as W & E for the purpose of work.

I can see how HMRC viewed this as different, if Taylor continued to live in Swindon during non-working periods between finishing one contract and starting another.

The difference is subtle, but I can see there is a difference.

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By ds
23rd Nov 2020 12:14

Is this another case of the Revenue going after the small man for what amounts to peanuts but leaving the multinational tax avoiders and evaders well alone because of either special "insider" deals or not able to risk the court battles in case they lose? From what I understand in the article the contractor was working as self employed and not under a limited company and so wasn't able to claim the advantages of that scheme. The journey from his home in Melrose to Swindon is 336 miles and takes around six hours driving, so not unreasonable to live locally at least during the week. National Rail suggests the cheapest rail fare of around £209 return and you can live in Swindon for a weekend for less than that so it would not be worth traveling home unless necessary. Once again we find the public sector has little grasp of the real world and the costs and pitfalls of trying to make an honest living. They should be well aware where their salaries and bonuses are coming from as last time I looked the Revenue do not make profits and do not pay corporation taxes.

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By AndrewV12
23rd Nov 2020 11:15

extract ABOVE
'During the 2016/17 year, Taylor chose Swindon to be his base to undertake work at various sites as there was better pay on offer'

that seems reasonable as Taylor WAS Working from the hotel, its not as if Taylor went to Swindon on the chance of work, long way to commute.

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By AndrewV12
23rd Nov 2020 11:17

extract ABOVE
'During the 2016/17 year, Taylor chose Swindon to be his base to undertake work at various sites as there was better pay on offer'

that seems reasonable as Taylor WAS Working in Swindon based at the hotel, its not as if Taylor went to Swindon on the chance of work, long way to commute.

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Replying to AndrewV12:
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By geoffmw1
23rd Nov 2020 11:30

Melrose Man has to take this further. I think he might have made a better case if he had changed his hotel accommodation from time to time; not necessarily always in Swindon.

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Replying to geoffmw1:
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By johnjenkins
23rd Nov 2020 12:42

Where you have the accommodation (as long as it's local to the work) and for how long (as long as the work continues) is irrelevant. The whole crux of the matter is that the accommodation is linked to the work by virtue of the fact that if there is no work there is no accommodation.

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Replying to johnjenkins:
By cfield
23rd Nov 2020 13:08

How do you distinguish that from an employee staying at an hotel or buying a flat just to be closer to work? Hamish Taylor did not stay at an hotel in order to do the work. He did so in order to get work a long way from home. It may seem unfair but those are the rules. There are solutions, as advised above, but he missed them. It's tough, but put it down to experience. No use moaning about it or trying to fight a losing battle. Better to learn from it instead. Get it right next time.

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Replying to cfield:
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By johnjenkins
23rd Nov 2020 13:47

It is irrelevant how far away the work is. The work and accommodation are directly linked so "wholly and exclusively" is right. Perhaps HMRC have got away with too much in the past and it's time they stuck to the LAW.

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Replying to johnjenkins:
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By Nigel Wulcko
24th Nov 2020 09:32

I was agreeing with you, JJ, rather than cfield, but looked into the internal guidance and found this part of the Horton v Young judgment (Brightman J):
"The example given in argument was a commercial traveller who has a home in London but whose operational area is confined to Cornwall. I can quite see that in such a case the cost of travelling between London and the borders of the Duchy would not be moneys wholly and exclusively laid out or expended for the purposes of that commercial traveller’s business".
It seems that the rules DO work against Mr Taylor.

I'm sure that when I did my training, the phrase was "wholly, exclusively and necessarily". Although the "necessarily" part seems to have been dropped, the law is still being applied as if it were still there. And it would appear to me that although the travel and accommodation were wholly and exclusively for work, it wasn't necessary for the taxpayer to work in Swindon, rather than close to home.

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Replying to Nigel Wulcko:
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By johnjenkins
24th Nov 2020 10:04

I have to disagree. If the work was in Swindon and there was no work (at that particular time) where he lived, then it was necessary. Where the work was is of no relevance. The only reason the expenses were incurred was because of work. No other reason. Again had he moved his family in then I would agree with the decision. Horton and Young is a different case and should never have been introduced into the defence. To me this case stands on its own merits. There are a few other cases I have looked at but this is different to all of them.

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Replying to AndrewV12:
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By geoffmw1
23rd Nov 2020 11:30

Melrose Man has to take this further. I think he might have made a better case if he had changed his hotel accommodation from time to time; not necessarily always in Swindon.

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wolfy
By rob winder
23rd Nov 2020 14:05

Were all of the travel and subsistence costs disallowed or just those relating to the time he was there looking for work? If its acceptable for him to claim them when he is carrying out a contract then presumably the only element that should be disallowed is the element incurred using the area as a base to look for work.

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