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Peter Vaines of Squire Sanders considers two recent tax cases: one on how long the taxpayer has to reimburse his employer in order to avoid a taxable benefit, and the other on the deductibility of travelling expenses when one has a home office - and points out that Mallalieu v Drummond is not as straight forwards as HMRC might think.

Benefits in Kind : Making Good

The general principle is well known that if an employer provides a benefit to an employee, the cash equivalent of that benefit is chargeable to tax as earnings, less so much of the benefit as is made good by the employee.

Of course there are lots of rules surrounding all these words but one crucial question is when must the benefit be made good? Does it have to be made good during the same tax year as the benefit is provided or can it be made good in a later year? You can guess what HMRC say.

This matter was examined in the case of Marshall v HMRC TC 2466. The case involved the provision of a motor car and ITEPA 2003 s 144(1) provides for a deduction from the taxable benefit if, as a condition of the car being made available for the employee’s private use, the employee:

“(a) is required in the tax year in question to pay (whether by way of deduction from earnings or otherwise) an amount of money for that use; and

(b) makes such payment”

HMRC argued that the amount required to be paid by the employee had to be paid in the year in question. The Tribunal did not agree. The qualifying words “in the tax year in question” appear only in sub-section (a) and do not appear in sub-section (b) and it was therefore perfectly permissible for the taxpayer to obtain a reduction in his current benefit in respect of a payment made after the year end.

Travel to Work

The recent Tribunal case of Samadian v HMRC TC 2523 revisits the old question of allowability of the expense of travelling from home to work or between places where a person has a business base, in circumstances where he has a business base at his home.

There are numerous authorities on this matter but the case of Mr Samadian brings a new twist.

Mr Samadian was a self employed consultant geriatrician. He worked from home but also worked at various NHS and private hospitals. His work at the NHS hospitals was pursuant to his employment with the NHS but his work at home and at the private hospitals was pursuant to his self employed activity.

It may reasonably be expected from a consideration of the earlier cases that travelling from home to an NHS hospital would not be allowable. On the other hand, despite Sargent v Barnes, there would be a reasonable case for a deduction to be allowed for travelling between his home base and the private hospitals or indeed between the private hospitals. However, it was the cost of travel between home and the private hospitals which was the problem.

The Tribunal accepted that Mr Samadian had a place of business at home. He also had places of business at the private hospitals. One might therefore have thought that the cost of travelling between two places of business ought to be allowable. However the Tribunal said that was not enough. They said that the test for deductibility established by Mallalieu v Drummond in 1983 applied because although Miss Mallalieu did not have any conscious non business motive for incurring the expenditure, she must necessarily have had a non business motive in her mind as well. One has to look behind the conscious motive of the taxpayer to see whether an unconscious object should also be inferred.

In this case, the Tribunal decided that Mr Samadian had a mixed object in his general pattern of travelling between his home and his places of business at the private hospitals:

"Part of his object in making those journeys must inescapably in our view, be in order to maintain a private place of residence which is geographically separate from the two hospitals. It follows that even though we find he has a place of business also at his home, his travel between his home and these two locations cannot be deductible on the basis of the reasoning in Mallalieu".

It seems really harsh to have a tax deduction denied by the thought police. The reason Mr Samadian Incurred expenditure from travelling from one base to another was exclusively for the purposes of his profession. The fact that he had his home at one of his business bases was simply the starting point for his journey. It is equally possible to say that travelling from one of the private hospitals to another was equally disallowable because there is an element of personal choice whether he made that journey at all. He was self employed and the master of his own destiny - he could have gone fishing. Again, the argument is the same whether he purchased a Dell computer or an Apple computer. This would be a matter of personal choice and therefore the difference in cost would be disallowable.

As the Tribunal was relying so firmly on Mallalieu v Drummond to deny this expenditure, they might have had regard to the following passage in the House of Lords judgment in Mallalieu v Drummond:

"Expenditure may be made exclusively to serve the purposes of the business but it may have a private advantage. The existence of that private advantage does not necessarily preclude the exclusivity of the business purposes. For example, a medical consultant has a friend in the South of France who is also his patient. He flies to the South of France for a week, staying in the home of his friend and attending professionally upon him. He seeks to recover the cost of his air fare. The question of fact will be whether the journey was undertaken solely to serve the purposes of the medical practice. This will be judged in the light of the taxpayer's object in making the journey. The question will be answered by considering whether the stay In the South of France was a reason, however subordinate, for undertaking the journey, or was not a reason but only the effect. If a week's stay on the Riviera was not an object of the consultant, if the consultant's only object was to attend upon his patient, his stay on the Riviera was an unavoidable effect of his expenditure on the journey and the expenditure lies outside the prohibition [for deduction]."