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MIKE DOWN and DAVID HEATON blow the whistle on a Revenue attack on the tax deductibility of expenses incurred by professional rugby players
The sports minister, Richard Caborn, was recently embarrassed on live radio. He failed to answer five fairly simple questions on sport.
The writers wonder if he would have been able to answer a further question: 'are you aware that the Inland Revenue is pursuing a campaign of tax enquiries into the tax returns of professional rugby players?'
As the Minister was unable to name the captain of the British & Irish Lions touring team, one assumes that his answer would be that he was not aware of the Revenue's significant level of activity in this field, unless, that is, he had read the judgment delivered on 23 May 2001 in the case of Ansell v Brown.
This was a case which by itself provides a mere glimpse of the Revenue's attitude to the tax deductibility of expenses incurred by professional rugby players.
To kick off we will look at the case itself and then follow up with a review of the many associated issues. The reader will soon appreciate that, far from being restricted to the world of rugby, these issues are of much wider application across the whole spectrum of professional sportsmen and sportswomen.
The taxpayer, Christopher Brown, was a professional rugby player employed by Caerphilly Rugby Football Club. In his 1996/97 self assessment tax return, he claimed as tax deductible the £173 cost of dietary supplements, which he purchased from health food shops and from manufacturers.
Section 198(1), Taxes Act 1998 provides that an employee can claim a tax deduction for monies 'expended wholly, exclusively and necessarily in the performance of the duties of the office or employment'.
As well as insisting that he play rugby for the club to the best of his ability, the appellant's employment contract provided that he should (a) maintain a very high level of physical fitness and (b) obey all reasonable directions from the club with regard to training, fitness, diet, and injury prevention and treatment.
His natural weight was insufficient for his back row position and he therefore took the dietary supplements purely to increase his size and physique. He considered that nobody 'normal' would take the supplements.
The General Commissioners concluded that the expense was allowable on the basis that 'there was no duality of purpose in these purchases and therefore the "wholly and exclusively" requirement of the section 198 test was fulfilled'. The Revenue appealed.
In the High Court
In his judgment, Mr Justice Lightman observed:
'The hurdles in front of a claim to entitlement to a deduction under section 198 are formidable. For over 40 years the courts have referred to the conditions for the entitlement as stringent, exacting and rigid.'
He went on to provide a helpful reminder of the relevant conditions:
(1) The expense must be incurred in the performance of the duties…It is not sufficient that the expense is incurred for the purposes of enabling the employee to prepare or qualify himself to perform his duties or for rendering or to keeping [sic] the employee fit (or improving his fitness) for performing his duties as an employee.
(2) It is not sufficient that the employer requires the employee to incur the expenditure: what is required is the duties themselves must oblige the employees to incur the particular outlay.
(3) The expense must be one which the employee is necessarily obliged to incur in the performance of the duties of the employment: the expense must be such as is imposed on anyone and everyone employed to perform the duties in question by the requirements or necessities of being so employed. The test is objective, and the right of deduction does not extend to expenses which are not so required but arise because of circumstances personal to the particular employee or are the result of his own volition. It is not sufficient that the expenditure is incurred in order to enable the office holder to perform his duties.'
Whilst expressing 'great sympathy for Mr Brown', the judge allowed the Revenue's appeal. Put simply, he felt that the Commissioners had failed to pay 'any (let alone due) regard' to the 'performance of the duties' test and had thus misdirected themselves in law.
The cost of the food supplements 'was an expenditure incurred to enable him to perform his duties, and not in the performance itself; and further it was an expenditure the need for which arose from his own personal circumstances, namely his need to increase his weight by reason of his underweight and desire to increase it.'
Accordingly, the expense did not 'constitute an expenditure in the performance of his duties as an employee of the club' and could not be deducted.
It is unfortunate that the Commissioners did not properly explore the 'performance' test. Whilst the authors readily accept the need to apply the 'stringent, exacting and rigid' conditions set out in section 198, they would question the implicit conclusion that once the final whistle has blown, Brown ceases to be a rugby player.
He is a sportsman at the top of his profession who must keep himself in a peak physical condition in order to stay there. Had he taken the supplements to, for example, double his body mass so that he might become a rugby star, that would be a different matter. But he did not. He was already there. He had already made it. He was incurring the expenditure simply to maintain and improve his size and physique.
Mr Justice Lightman's judgment refers to several cases, notably Simpson v Tate 1925 TC 314. Is Brown's situation distinguishable from that of Mr Tate, a county medical officer?. The authors would argue that it is. Mr Tate was denied relief for subscriptions to professional societies on the grounds that they enabled him to continue to hold office.
There is surely a level of remoteness in Tate which is not apparent with Brown, who takes the supplements only because they have the direct result of maintaining his ability to play top class rugby.
Arguably, the same cannot be said about Mr Tate incurring the expense of society membership: firstly it had benefits other than simply enabling him to keep his job and secondly, membership could only indirectly affect the way he carried out his duties.
A larger topic
Unfortunately, insufficient funds prevented Mr Brown from referring his case upwards to the Court of Appeal. But the tax deductibility of dietary supplements is only one of a number of open Schedule E issues relating to professional rugby players.
Indeed, there were other matters brought before the General Commissioners in Mr Brown's case which are worthy of further discussion.
Before proceeding to examine these, it should be noted that at least one South Wales tax district is known to have initiated a draft checklist of items it considers allowable and disallowable in relation to professional rugby players.
The authors' understanding is that the checklist was issued both in an attempt to provide helpful guidance for those concerned and (from the Revenue's standpoint) cut down on the number of time-consuming tax enquiries being opened.
As long as appropriate evidence can be supplied, the district confirms that it will accept the following expenses as allowable within section 198(1):
1. The cost of admission to training facilities, provided that (a) it is part of the player's contractual duties to maintain a specified level of physical fitness and (b) the club (his employer) does not either provide or pay for the necessary training facilities.
2. The cost of necessary travel to away matches, provided that the club does not make available or pay for transport to those matches.
3. The cost of necessary subsistence at away matches, provided that neither home nor away club pays for or lays on food or accommodation.
4. The cost of travel between places where the player is required to perform his duties, provided that (a) the training regime under the terms of the player's contract requires the use of the facilities at both of those places on the same day, and (b) those training needs could not be met without undertaking the journey for which a claim is made, and (c) the player is required by the club to meet those expenses himself.
5. The cost of the kit used for training and playing, provided that (a) the kit is used exclusively for performing the player's contractual duties to play or to train for the club and (b) the club does not provide or otherwise meet the cost of the necessary kit.
As well as dietary supplements, the following expenses are considered by the Revenue not to be allowable under section 198(1):
6. The cost of travel between the player's home and the club ground or between his home and one of his regular training venues.
7. The cost of travel between a place of work for a different employer and the club ground or between that place and one of the player's regular training venues.
8. Additional food consumed because of the physical demands of playing and training.
9. Health insurance premiums or private health plans.
10. The cost of any item of kit or clothing which is not used exclusively for the playing and training duties laid down by the player's contract.
11. The cost of any item bought because of the player's preference rather than the objective requirements of the job.
A nice try
The authors have little difficulty in accepting the Revenue's viewpoint in items 1, 4, 5, 7, 9, 10 and 11. However, we would consider carefully the district's stance on the other expense headings, all of which were considered by the Commissioners in Ansell v Brown.
Travel
The restrictions placed on the away travel and subsistence expenditure (points 2 and 3) seem unnecessarily harsh. When considering the post-1998 rules and in particular the definitions of 'ordinary commuting' and 'private travel' in paragraph 2 of Schedule 12A to the Taxes Act 1988, in what way do these costs fail the deductibility test?
The costs are necessarily incurred in travelling in the performance of the duties if the employer does not make transport and accommodation available. Even if the club hires a bus for travel to away games, it may be inconvenient or illogical for the player to take the bus (for example, if the player lives in Bristol, he would not travel to Cardiff to catch a team bus to a match in Leicester).
His costs surely fall within section 198(1A)(b) as costs attributable to his necessary attendance at a temporary place of work. The existence of the employer's team bus is, in the authors' view, wholly irrelevant under current law and it is submitted that the district guidance has not kept up with play.
Nowadays, the only 'necessity' is the attendance at the temporary workplace, and if the costs do not relate to private travel or ordinary commuting as defined they are allowable.
Training
The disallowance for travel to training venues (point 6) is interesting. Typically, not all training will be undertaken at the club's own ground, especially where star players are recruited from other clubs without a requirement to relocate.
Strength and aerobic fitness training may be undertaken in any suitably-equipped gym, so there is often no need for travel to the club's own facilities. The question again turns on section 198(1A).
The costs of travel to a gym in the next town, which is closer to home than the club's facilities, are arguably 'necessarily expended on travelling in the performance of the duties' (section 198(1A)(a)). If that is true, then the question of whether the trip represents ordinary commuting to a 'permanent' workplace (section 198(1A)(b)) is irrelevant.
Even if it is agreed that subsection (1A)(a) does not apply, leaving the entitlement to deduct dependent on subsection (1A)(b), the Revenue surely still has to establish that the other training facility is a 'permanent workplace'. In some cases, the player will use the same facilities every week on the same days, but in others the use of those facilities will be irregular and random.
Professional players would presumably be well advised to carry out their training at a series of locations which are used more or less irregularly; it would be interesting to see whether the district would then seek to treat them as area-based.
Diet
The General Commissioners considered point 8 when deciding that the cost of additional food consumed by Mr Brown was not allowable. Rugby players typically eat little in the hours leading up to a match and Mr Brown (who has a degree in movement science) argued that the food provided by the host club was of insufficient quantity and nutritional content to fully satisfy his professional requirements.
He therefore bought additional food to provide a more balanced diet.
Given the strength of the Revenue's 'duality of purpose' argument, it seems difficult to envisage a situation where the taxpayer might be able to contend that the additional food had no bearing on his health and well-being.
The only window of opportunity in mounting a case might be to say that the extra food is just that — in other words it is over and above the 'normal' level of food required by a human being of similar size and physique to stay alive, or at least to stay well. But this is a long shot and in truth, the Revenue's view here is hard to challenge.
Replay required
It should be noted that specialist tax counsel was not involved at any stage of the Ansell v Brown case. It is the authors' view that were a fresh appeal to be brought before the Commissioners and vigorously argued through the Courts by leading tax counsel, the expense of away travel and subsistence, travel to training grounds and purchase of food supplements might all be found to be tax deductible and the current district guidance be ruled offside.
Might the Revenue checklist then need changing? Might the district need to seek other enquiry work? Might the extra tax relief leave a hole in the Treasury's coffers? Now there's a real question for a Minister to answer..!
Mike Down is a Director and David Heaton a Partner at Baker Tilly. The views expressed in this article are their own and do not necessarily reflect those of Baker Tilly. Mike and David are indebted to Clive Davies of Alexander Partnership Llanelli for providing the background information.
The funding of a suitable 'test case' relating to some or all of the issues raised is actively being considered. If you are willing to contribute financially or have other ideas as to how you might assist with an appeal, please contact Clive directly on 01554-773633, or write to him at Alexander Partnership, 5 West End, Llanelli, SA15 3DN.
