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Peter Vaines of Squire Sanders comments on the Upper Tribunal’s findings in the Healy case.

Introduction

The Upper Tribunal has recently considered HMRC's appeal in the case of Healy where the First Tier Tribunal allowed Mr Healy a deduction from his professional income as an actor for the costs of renting a flat close to the theatre where he was in a long running production. The problem can be expressed comparatively simply. If he had stayed in a hotel close to the theatre that would have been deductible so why should the (no doubt cheaper) cost of renting a flat for exactly the purpose not be tax deductible?

Wholly and Exclusively – Dual Purpose

Unfortunately, the analysis is not so easy. To be entitled to a deduction, the expenditure must be laid out wholly and exclusively for the purposes of trade. If the money is spent partly for business purposes and partly for private purposes none of it is deductible. Everybody knows that. The difficult bit is determining what is a private purpose. You might think that buying clothes exclusively (even necessarily) for the purposes of your work would be deductible. Even more so if the idea of some private purpose never entered your head. However, we know from Mallalieu v Drummond that this is not good enough. We must have regard to the subconscious motive of the taxpayer – that is the motive that he does not know about. In the case of Mallalieu v Drummond, the subconscious motive was the need for warmth and decency. It was this subconscious private motive which meant that the whole of the expenditure was disallowable on the grounds of duality of purpose.

Purpose and Effect

However, in Mallalieu v Drummond the House of Lords recognised that there is a distinction between the purpose of the expenditure and the effect of that expenditure. The best example is that of the doctor who needs to attend upon his patient who lives in the South of France. The cost of his journey is deductible if attending on his patient is the sole purpose for the trip – the fact that he will have a nice time in the South of France is incidental and not a private purpose.

Returning to Mr Healy, the First Tier Tribunal found that his sole purpose for renting the flat was wholly and exclusively in connection with his profession as an "actor". Not quite the right wording perhaps, but certainly close enough. The Upper Tribunal said that the First Tier Tribunal did not apply the right test.

They should have considered whether there was a dual purpose in Mr Healy renting the flat. This is a bit puzzling because the Tribunal actually said "I do not find that there was a duality of purpose".

Anyway the Upper Tribunal went on to say that they should have considered whether the effect of taking the flat, namely of providing him with warmth shelter and comfort, was merely incidental to the business purposes or whether there was a dual purpose.

Incidental Effect

The Upper Tribunal explained that there is a distinction between effects which are aimed at (and that is the purpose of the expenditure) and those which are incidental to that aim. (Having regard to the above, this is rather unfortunate wording, but I think it is clear what they mean.) They said that it was necessary to establish on a subjective basis what was in Mr Healy's mind when he entered into the tenancy agreement. The Upper Tribunal did not have the benefit of the presence of Mr Healy and were unable to carry out that exercise so the matter has been remitted to the First Tier Tribunal for reconsideration.

This all seems a bit odd to me. The clear evidence was that that Mr Healy's subjective purpose was to do nothing more than provide himself with the equivalent of hotel accommodation. He could hardly give evidence about his subconscious purpose – if he knew about it, it would not be subconscious.

Consciously Sub-Conscious...

Accordingly, I cannot see why the Upper Tribunal were concerned that they did not have Mr Healy before them to consider this aspect. He could not have told them about his subconscious motive and it would have to be inferred from the facts. Anyway, the matter is going back to the First Tier Tribunal and they are going to consider whether there was a duality of purpose or not.

It gets odder.

The Upper Tribunal acknowledged that if a duality of purpose test were to be applied to expenditure for hotel accommodation it could never be deductible because it inevitably provided shelter and warmth.

The Tribunal concluded that if the provision of warmth and shelter is merely an incidental aspect of the expenditure rather than a purpose in itself, the expenditure is allowable. But why does anybody stay in a hotel? It is for warmth and shelter overnight – that is the whole point – and it certainly seems no more incidental that Miss Mallalieu's court clothing for which she failed to obtain a deduction because they provided her with warmth and decency.

Trying to divine some general principle here is getting increasingly difficult although it will be very interesting to see what happens when the matter is reheard by the First Tier Tribunal.