[2011] UKFTT 92 (TC)

TC00969

Appeal reference:TC/2009/11851

INCOME TAX – schedule D – trade – deduction – expenses – building subcontractor – working at different building sites for successive short periods – cost of travel between home and site – appeal succeeds

FIRST- TIER TRIBUNAL

TAX

SEAN REEDAppellant

-and-

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMSRespondents

Tribunal: Jennifer Trigger (Judge)

Peter Whitehead (Member)

Sitting in public in Manchester on 29 November 2010

Mr. R L Jones, tax consultant, for the Appellant

Mr. T Burke and Mr. Osborne of HMRC for the Respondents

© CROWN COPYRIGHT 2011

DECISION

  1. This appeal is made by Mr. Sean Reed (“the Appellant”), who during the period relevant to this appeal undertook work as a scaffolder for O’Reilly Scaffolding as a self-employed contractor and as an employee, against closure notices and amendments and a discovery assessment to income tax. The assessments to tax for the year 2005 / 06 was in the sum of £925.98, for the year 2004 / 05 in the sum of £1,165.73, and in the year 2003 / 04 in the sum of £1,718.24.
  1. The Appellant appealed against the disallowance of expenses relating to the cost of travel from his home in Grimsby to his rented accommodation in Birmingham and the rent on the accommodation in Birminghampaid by the Appellant.
  1. The Appellant disagreed with the Commissioners for Her Majesty’s Revenue and Customs’ (“the Commissioners”) view that in the 2003 / 04 and 2004 / 05 tax years the expenses incurred by the Appellant for the cost of travel and accommodation, were not laid out or expended wholly and exclusively for the purposes of his trade as a self-employed labour only scaffolder. The Appellant also disagreed with the Commissioners’ decision that in the 2005 / 60 tax year the said expenses were not to be allowed because the Appellant was not obliged to incur and pay the expenses as holder of the employment and the amount was not incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
  1. Subsequently the Commissioners accepted that the Appellant is entitled to the expenses claimed in the tax year 2005 / 06. We were asked to determine that year’s appeal only in favour of the Appellant. Accordingly we found that the Appellant is entitled to the expenses claimed for the tax year 2005 / 06.
  1. Additionally the Appellant made a further contention, that being that he should be treated as an employee during the tax years 2003 / 04 and 2004 / 05. Before us Mr. Jones on behalf of the Appellant did not withdraw that contention but merely conceded that there would be considerable logistical difficulties in obtaining information from Mr. O’Reilly of O’Reilly Scaffolding. On this issue of status it was the Appellant’s case that whilst working for O’Reilly Scaffolding he was an employee in the tax years 2000 / 01 to 5 April 2003 inclusive. Thereafter the Appellant was self-employed for the tax years 6 April 2003 to 5 April 2005. From 6 April 2005 until he ceased to work for O’Reilly Scaffolding the Appellant was an employee. That period of employmentbegan on 6 April 2005 and ended on 25 January 2006.
  1. The Appellant gave evidence that in 2003 he had been told by Mr. O’Reilly, of O’Reilly Scaffolding, that he was no longer an employee and that from henceforth he would be self-employed, providing services to O’Reilly Scaffolding. The Appellant instructed accountants, First Choice Accountancy, to complete the self-assessment returns for the tax years 2003 / 04 and 2004 / 05 on the basis that he was self-employed. First Choice Accountancy had submitted the self-assessment returns to the Commissioners on the basis that the Appellant was self-employed. The Appellant had not queried his status at that time and had acted in all respects as if he were a self-employed scaffolder. No enquiries had been made by the Commissioners with Mr. O’Reilly or O’Reilly Scaffolding as the issue of the Appellant’s status had not been raised by the Appellant until the Appellant’s skeleton argument was served on the Commissioners on 15 November 2010. We were asked by the Commissioners to rule on the Appellant’s status during the tax years 2003 / 04 and 2004 / 05.
  1. In our judgment the Appellant was self-employed during the tax years 2003 / 04 and 2004 / 05. The Appellant had not queried the change of status at the time it was communicated to him by Mr. O’Reilly that he was to be a self-employed scaffolder providing services to O’Reilly Scaffolding. The Appellant had completed the self-assessment returns on the basis that he was self-employed and these had been submitted to the Commissioners by his accountant on that basis. The Appellant had made no enquiries with the Commissioners. There was ample evidence available for the Appellant to read in the form of Commissioners’ leaflets IR56 and IR148. Both these documents were available to the Appellant and his accountants at the time the returns for those tax years were submitted. Accordingly we proceeded to deal with the appeal on the basis that the Appellant was self-employed during the tax years 2003 / 40 and 2004 / 05.
  1. Both the Appellant and the Commissioners asked that we consider whether the Appellant could claim, during his period of self-employment from 6 April 2003 to 5 April 2005, his travelling expenses from Grimsby to Birmingham and his accommodation costs in the Birmingham area. We were specifically asked, in the event that we found in favour of the Appellant, not to consider the amount of travelling expenses and accommodation costs actually recoverable. We proceeded to hear the appeal on the basis of this concession made by both parties.
  1. It was the Commissioners’ case that the Appellant had shown several addresses on his Returns. These being 124 Devonshire Road, Smethwick, Birmingham, 225 Wellholme Road, Grimsby, 32 Hare Street, Grimsby, but not 71 Cromwell Road, Grimsby.
  1. It was the Appellant’s case that he owned the first floor flat numbered 71A at 71 Cromwell Road, Grimsby. He had purchased this property in 1988 from his aunt. In order to purchase the property he had taken out a mortgage with the National Westminster Bank, which was repayable at the sum of £300 per month. Flat 71B was not owned by the Appellant. During the Appellant’s ownership of 71A Cromwell Road there had been a number of tenants occupying 71B Cromwell Road. The Appellant believed that a Mr. Derek E Parker owned 71B Cromwell Road. In any event 71A Cromwell Road had, according to the Appellant, been his main residence and his home until the property was sold in mid-December 2004. From January 2005 until February 2006 the Appellant lived at 37 The Ridgeway, Grimsby. This was the Appellant’s mother’s address and he lived there with his mother. The Appellant was unable to supply us with the specific dates in January 2005 and February 2006 that he moved into 37 The Ridgeway and then left that address. In any event in February 2006 the Appellant moved to another property in Grimsby. This was 225 Wellholme Road. At that address there lived Miss Lucy Reeves. Also resident at that address were two children of Miss Reeves’ by another relationship, and one child born on 1 November 2005 who was the child of the Appellant and Miss Reeves. The Appellant subsequently moved with Miss Reeves from 225 Wellholme Road to other properties in Grimsby, namely 32 Hare Street and 65 Patrick Street. Residence at these addresses is outside the period we were asked to consider.
  1. It was the Appellant’s case that his business was based in Grimsby. The Appellant regarded 71 Cromwell Road, 225 Wellholme Road and 37 The Ridgeway as his home and business base throughout the relevant period. The Commissioners considered that 71 Cromwell Road could not be the Appellant’s base address for business purposes. It had not featured in the Appellant’s returns. Furthermore 225 Wellholme Road is referred to only once in the returns with insufficient detail, and the Commissioners considered that we should disregard that premises as a potential base address. The Commissioners contended that throughout the period the Appellant was working in the Birmingham area he lived at 124 Devonshire Road, Smethwick, and accordingly his business was based in Birmingham. He had entered into a tenancy agreement on 1 March 2005 for a twelve-month term with his landlord Phillip O’Reilly of O’Reilly Scaffolding. The Commissioners asserted that this was a continuation of previous agreements whereby the Appellant was permitted to live in property owned by O’Reilly Scaffolding. The Commissioners considered that as a matter of fact the Appellant’s business was based in Birmingham and that during the two-year period 2004 / 04 and 2004 / 05, the Appellant’s base was at 124 Devonshire Road, Smethwick.
  1. We were referred to section 74(1) of the Income and Corporation taxes Act 1988 which determines, so far as it is relevant, that expenses allowable for someone who is self-employed have to be incurred wholly and exclusively in the conduct of the business. The Commissioners considered that travel between Grimsby and Birmingham was not allowable as the Appellant was based in Birmingham. Furthermore his living expenses at 124 Devonshire Roadwere incurred to allow the Appellant to live nearer to his work, and accordingly they were not allowable either.
  1. Diary evidence which had been produced to the Commissioners by the Appellant did not in the view of the Commissioners support the Appellant’s contention that he returned to Grimsby every week. In fact the Commissioners stated that the diaries did not show any journeys to Grimsby.
  1. The Appellant explained that he returned home 90 times per year, home being Grimsby, and that when it was recorded in his diary “off” this was a record of when he went back to Grimsby. In particular he was travelling to and from Grimsby on many occasions towards the end of 2005. This was occasioned because his father was ill and his father subsequently died in December 2005. Mr. Burke referred us to Horton v Young (HM Inspector of Taxes) 47 TC60. In this case the issue of allowable expenses was looked at in detail with Brightman J quoting Denning J from Newsom v Robertson(HM Inspector of Taxes) 33 TC452:

“A distinction must be drawn between living expenses and business expenses. In order to decide into which category to put the cost of travelling, you must look to see what is the base from which the trade, profession, or occupation is carried on. In the case of a tradesman, the base of his trading operation is his shop. In the case of a barrister, it is his chambers. Once he gets to his chambers, the cost of travelling to the various courts is incurred wholly and exclusively for the purposes of his profession. But it is different with the cost of travelling from his home to his chambers and back. That is incurred because he lives at a distance from his base. It is incurred for the purposes of his living there and not for the purposes of his profession, or at any rate not wholly or exclusively; and this is so, whether he has a choice in the matter or not.”

  1. In the case of Mason v Tyson(HM Inspector of Taxes) 53 TC333 Walton J considered the question of why it was necessary to have somewhere to live else closer to where the work was, and the expenditure relating to that. The opinion was given in Walton J’s words:

“Mr. Mason had to have somewhere to sleep. He could very well have slept at his Kensington home. That, of course, would have entailed that he would not have had so much time to give to the practice. But when he was sleeping in his flat above the practice he was having a good night’s sleep, which was essential to him whether, the following day, he was going to work or play or to do a bit of one and a bit of the other. That being so, it seems to me that it is quite impossible to say that any money expended on redecorating or running the flat was “wholly and exclusively laid out or expended for the purposes of the profession”. Those are the words to be found in section 130(A) of the Income and Corporation taxes Act 1970 and there are many cases in the books which lay it down that those words mean exactly what they say. Part of the expenditure must have been, inevitably, merely providing Mr. Mason with the needed night’s rest.”

  1. In reliance on this case Mr. Burke invited us to conclude that the cost of the accommodation at 124 Devonshire Place was not an expense that the Appellant could recover. We were referred by Mr. Burke to the case of Prior (HM Inspector of Taxes) v Saunders 66 TC210. In this case the costs were associated with a trader working away. The Court held that the expenditure was not allowable.
  1. We were referred also to the case of Sargeant (HM Inspector of Taxes) v Barnes 52 TC355 where travelling expenses as part of a journey were considered. In this case a dental surgeon who visited his laboratory on his way from his home to his surgery was not allowed to deduct the cost of the travel from the laboratory to the surgery. The purpose of the expenditure (that is the travel costs) was to get the dental surgeon from his home to his surgery. The fact that he was able to stop on his way between his home and his surgery at the laboratory did not affect the primary purpose – to get from his home to his surgery.
  1. On behalf of the Appellant Mr. Jones asserted that the Appellant had been an employee of Mr. O’Reilly for approximately three years prior to the tax year 2003 / 04. The business of O’Reilly Scaffolding operated out of two locations. One was based in Birmingham and the other in York. The Appellant had worked out of both locations and had not been limited to one location. In addition the Appellant had worked for considerable spells on sites in London. In evidence before us the Appellant had confirmed that he had worked in Wales and in Leeds, also.
  1. The accommodation used by the Appellant in Birmingham was used only when he was working within daily travel of that accommodation and was used as an alternative to hotel accommodation. When working at other locations the Appellant stayed in a hotel or similar accommodation or he travelled to and from his home in Grimsby. The Appellant had confirmed in evidence before us that when he first started working for O’Reilly Scaffolding he had for the first six months of his employment lived in a hotel. When this proved too expensive he moved into rented accommodation. This rented accommodation was provided by Mr. O’Reilly who owned a number of properties. The first rented accommodation that the Appellant moved into was Tyebeam, Shard End, Birmingham. The Appellant moved from there to another property owned by Mr. O’Reilly, namely 124 Devonshire Road where the rental was slightly less. The cost of the rental was deducted from his wages by Mr. O’Reilly. In or around August 2005 the Appellant had moved out of 124 Devonshire Road; thereafter he had lived at an address in Acox Green, Birmingham, a property owned by Mr. O’Reilly; thereafter the Appellant moved to another property, again owned by Mr. O’Reilly. We were not supplied with the address of that property. Throughout this period Mr. O’Reilly deducted from the money due to the Appellant the cost of the rent of each property occupied. Mr. Jones directed us to the diaries produced by the Appellant. The first of the two diaries, Mr. Jones explained, covered the early part of 2003 / 04 from which could be seen that about 50% or more of the Appellant’s working time was spent in the vicinity of York and not Birmingham. The Appellant in evidence confirmed that he regularly received instructions from O’Reilly Scaffolding to his home at 71 Cromwell Road, Grimsby. In those telephone conversations the Appellant would be given details as to his next place of work, with instructions as to what work was to be undertaken. The Appellant would travel from 71 Cromwell Road direct to various locations in addition to Birmingham to work. The Appellant worked also between sites in the vicinity of Birmingham as directed.
  1. Mr. Jones explained that it had been agreed by the Commissioners that the Appellant is an itinerant worker and that during the period that the Appellant was an employee he was an itinerant worker without geographical boundary. As an itinerant worker without geographical boundary Mr. Jones maintained that the Appellant was entitled to an allowance for travel. Furthermore overnight subsistence is part of the expense of travel and similarly allowable. When convenient the Appellant travelled to and from home in Grimsby to fulfil his responsibilities, otherwise he stopped in hotel accommodation except when in the Midlands area when, as a cheaper alternative to staying in hotels, the Appellant stayed in rented accommodation. Mr. Jones said that the Appellant did not have any self-imposed area beyond which he was not prepared to work. As the Appellant was required to work out of both York and Birmingham, and York and Birmingham areas overlap, it was Mr. Jones’ contention that the Appellant lived within the area and the expenses incurred qualified for relief in full. We were helpfully provided by Mr. Jones with a map, which clearly showed that the sites at which the Appellant worked were generally not within daily travel. As an itinerant worker the Appellant’s business base was at his home in Grimsby and that the Appellant’s expenses for travelling and accommodation were wholly, necessarily and exclusively incurred in the conduct of his business.
  1. After a careful consideration of the facts and determining the matter on the balance of probabilities, we made the following findings:
  • That the Appellant’s home or base of operations was Grimsby.
  • That during the period 2003 / 04 to 2004 / 05 the Appellant’s home or base of business in the Grimsby area was firstly 71 Cromwell Road and thereafter 37 The Ridgeway.
  • That the Appellant was an itinerant worker.
  • That the Appellant’s travel and subsistence expenses were wholly, exclusively and necessarily incurred in the course of his business.

It was our view that the Appellant had always regarded Grimsby as his home. He had been brought up in Grimsby and in 1988 bought a first floor flat which was his home until it was sold in December 2004. During his time with O’Reilly Scaffolding both as an employee and as a self-employed contractor, the Appellant had incurred travelling expenses and necessary accommodation costs in order to fulfil the terms on which he was engaged. The Appellant had sought to minimise the extent of those expenses by renting accommodation from Mr. O’Reilly of O’Reilly Scaffolding. This fact did not turn, in our view, the accommodation rented in the Birmingham area into a business base. It was a necessary and praise-worthy expedient to reduce the expenses incurred wholly and necessarily for his business to live in rented accommodation rather than to incur the greater expense of hotel accommodation. It was clear to us that the Appellant had whilst working in the Birmingham area lived in a variety of premises and it was not, in our view, possible to say that any of them formed a base of operations. The Appellant gave evidence that he received instruction whilst at home in Grimsby at 71 Cromwell Road. That premises in our view was the only constant feature in the Appellant’s working life where matters relating to his business were conducted. The same could be said, in our view, of 37 The Ridgeway. The instructions given to the Appellant were by mobile phone, the existence or use of a land line was not a matter to which our attention was drawn. From the Appellant’s home in Grimsby he was directed to areas of operation outside Birmingham with regular frequency. In many cases the Appellant was able to work from his base in Grimsby, travelling daily to the place of work designated for that day. On other occasions it was necessary for the Appellant to use hotel accommodation or bed and breakfast accommodation as appropriate, together with the rented accommodation already referred to. The Appellant’s pattern of work had continued over a period of six years starting in the tax year 2000 / 01 and ending in the tax year 2005 / 06. It was a continuing pattern of itinerant work both as an employed earner and as a self-employed contractor.