Peter Vaines looks at a recent case that demonstrates how duality of purpose has moved on since Mallalieu v Drummond and considers alternate reality of NRCGT penalties. Again.
Duality of Purpose
The wholly and exclusively rule and the concept of duality of purpose has dogged tax advisers and their clients for generations.
Businessmen find it completely incomprehensible (they have another word for it) that expenditure which is obviously incurred entirely for business purposes – like the cost of travelling to work – is not deductible from their profits for tax purposes. We of course know better. We know that such expenditure is not for business purposes because it “is not to enable a man to do his work but to live away from it.” (Newsom v Robertson 33 TC 452)
Money spent on work clothing is another example. The current formulation of the rule is found in section 34 ITTOIA 2005 rule, that the expenditure must be incurred “wholly and exclusively for the purposes of the trade”. The House of Lords ruled in Mallalieu v Drummond 57 TC 330 that where a taxpayer purchased clothing which is required for doing her job, it was not enough for the expenditure to be wholly and exclusively for the purposes of her trade (or profession). One may wonder why not, if she satisfied precisely the requirements of the section.
This is because it was also necessary to consider her subconscious purpose – which in the case of Miss Mallalieu, was not only to ensure that she was properly dressed for appearing in court (and without which she would not have been heard) but also to satisfy the requirements of warmth and decency. On these grounds she was not entitled to any deduction for the expenditure.
We know that this is right because the House of Lords said so – and that is the law – but it makes a deduction for any business expenditure very difficult. Just as tax advisers can often find a business purpose for almost any item of expenditure if they try hard enough – so can HMRC find a subconscious non-business motive if they put their mind to it.
With this background, it is interesting to read the First Tier Tribunal decision in Gemma Daniels TC6640. Miss Daniels was a self-employed dancer at Stringfellows. She made a claim to deduct the cost of her work clothes. Seeing as how she danced without any clothes on at all (although the judgment does indicate that she kept her shoes on), she obviously had no subconscious purpose of warmth and decency. It is not at all clear what part of her work she needed the clothes for, if it was not to wear when she was dancing, even though the Tribunal judge referred to the clothes as being “alluring”. Best not go there.
There are extracts from both judgments which are (surprisingly) interchangeable and one might have thought that Miss Daniels had little chance with her claim in the face of such powerful authority. However, the Tribunal felt able to distinguish Mallalieu v Drummond and allowed Miss Daniels a deduction for the cost of her clothing.
This gives rise to the odd comparison with Miss Mallalieu who would not have been permitted to do her job in court if she did not have the right clothes – but Miss Daniels would not have been allowed to do her job on the dance floor if she was wearing any clothes. (To anybody unversed in tax matters these decisions might seem to be the wrong way round).
Mallalieu v Drummond was decided in 1983 and an interesting feature of the decision of the Special Commissioners is that it started with the following sentence: “Miss Mallalieu is an attractive blond barrister” which was presumably a finding of fact rather than law. Although it was undoubtedly true, there would be very serious consequences if a judge made such a statement now. The world has moved on - and so perhaps should the reasoning in Mallalieu v Drummond. Maybe the decision in Gemma Daniels is a first step in that direction.
I think that the inevitable appeal will be interesting.
Non Resident CGT and Penalties
I have made frequent reference to the penalties for the failure to submit a Non-Residence Capital Gains Tax return and the excessively onerous nature of the obligations which seem almost to be designed to assist taxpayers to fall into error – which of course generates penalties for HMRC. (So, bad motivation or bad design? Either way, it must be wrong).
The penalty cases continue – on and on. There is an increasingly long list. The subject has gone completely mad. There are some judges who consistently and regularly say there should be no penalties for a number of reasons, both technically on the grounds that the penalty is not properly chargeable and even if it is, there is a reasonable excuse or there are special circumstances to eliminate the penalties. However, there are other judges who equally consistently and regularly take exactly the opposite point of view.
It is little short of scandalous that anybody appealing against the penalty knows whether they will win or lose depends entirely upon which judge they get. (This would seem to be the modern version of “Equity varies with the length of the Chancellor's foot" which I thought was condemned (and corrected) in the 17th century). It is certainly deserving of the cry “something ought to be done”. I do not suppose that anybody minds which is the correct view – but we really are entitled to know what the right view is.
Although the amounts involved are important to the taxpayers involved, they are rarely enough to warrant an appeal (and the inevitable risks about costs) but I dare say that will happen in due course.
The sensible course would be for HMRC to make an amendment to put the matter beyond doubt, thereby eliminating a whole load of appeals to the Tribunal and a lot of reputational damage into the bargain.
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