Milkman Delivers For The Self Employed!

MIKE DOWN and CHRIS JOWITT raise their (milk) glasses to a Special Commissioner's decision on travel expenses which looks likely to curtail Revenue attempts to 'get at the cream'.

WHAT COULD PROVE to be an important decision for a number of self-employed people was given by the Special Commissioner, Dr Nuala Brice, on 22 October 2002 in what may become known as the 'milkman' case of Powell v Jackman.

Mr Powell, one of about 1,000 self-employed milkmen operating under a Unigate (now Dairy Crest) franchise agreement, successfully contended that his business base of operation was his home. As a consequence, his travelling expenditure in getting from his home to the depot, where, among other things, he kept his milk float and from where he operated his milk round, was 'wholly and exclusively laid out for the purposes of the trade' and not excluded under section 74(1)(a), Taxes Act 1988.

At the time of writing this article, the Inland Revenue has not said whether or not it will be appealing against what appears to be a 'gold top' result for the taxpayer.

Leading decisions

In reaching her decision, the Special Commissioner considered the three leading cases involving Schedule D travel expenses and the home: 'the barrister, the subcontractor and the dentist'. Let us remind ourselves of each in turn.

The barrister

The decision in Newsom v Robertson 33 TC 452 made it clear that it was necessary to establish the base of operation of the business and, if this was not the home, the cost of travelling from home was not allowed. Mr Newsom's travelling expenses were not tax deductible because his chambers were adjudged to be his base of operation, and not his home.

The subcontractor

In Horton v Young 47 TC 60, the subcontractor's base of operation was his home. The cost of travelling from home to various sites at which he worked was therefore allowable.

The dentist

In Sargent v Barnes [1978] STC 322, the base of operation was the dentist's surgery. No part of the cost of travel from home to the surgery was therefore an allowable expense, notwithstanding that he made a business stop on the way.

Vigorous refusal

Unfortunately, as tax practitioners are only too aware, Revenue Inspectors tend to contest vigorously any claims to deduct the cost of travel involving regular journeys emanating from the home. This approach derives from the Revenue's instruction books, which make it clear that a business base needs to be established, as a matter of fact, in each individual case when considering claims for travelling expenses.

Backed up by the examples of the Inspector's Manual at paragraph IM3122, it seems that Inspectors have, in the recent past, too readily concluded that a taxpayer's base of operation is other than the home, thus seeking to disallow a tax deduction for the costs incurred in getting from the true base of operation (the home) to the place at which activities relating to the business are carried out. This was precisely the stance taken from the outset by the Inspector in Mr Powell's case.

Before the Special Commissioner, the Revenue contended:

• Travelling to the depot was not 'wholly and exclusively' incurred for the purpose of the appellant's trade because it arose at least in part from his personal choice of residence.
• Mr Powell's business radiated from the depot, not from his home, and his customer base (the 'round' spread across some 35 named roads) was related to the depot and not to the home.
• The purpose of the travel was to move from home to base, which was a living expense as distinct from a business expense.
• Mr Powell served his customers from the depot and not from his home. The job dictated that he serve his customers from the depot because that was where the milk and other goods were kept.
• The contracts entered into by Mr Powell were entered into on his milk round.
• The franchise agreement was silent about the use of the home as an office and did not assume that the home would be so used.
• Mr Powell had chosen to live where he did and the expenditure had a dual purpose because it was partly to enable him to travel from home to work.

Revision required

The judgment given by the Special Commissioner suggests that the Revenue's approach in its Inspector's Manual at paragraph IM3122 requires a shake-up.

In reaching her decision in favour of Mr Powell, the Special Commissioner applied the principles derived from the three cases mentioned earlier to the facts of the appeal before her. She stated, adopting the analysis relied upon on behalf of Mr Powell:

'I conclude that the appellant calls at the depot to pick up his float and milk (and to return it in the afternoon) on his way from his base of operation (his home) to his round and later from his round to his base of operation (his home). The fact that he stops at an intermediate point to carry out an activity exclusively referable to his trade (that is picking up his vehicle, milk and goods for sale) cannot affect the purpose of the journey. For the reasons given, therefore, my conclusion is that the expenditure incurred by the appellant in travelling from his home to the depot was wholly and exclusively expended for the purposes of his trade.'

Other potential winners

A large number of other business taxpayers may soon be queuing up behind the milk floats to seek to apply the fruits of the Powell decision. Apart from the considerable number of self-employed franchisee milkmen who will be favourably affected, it would seem that the following types of self-employed people might also benefit:

• Those who keep a vehicle, such as a van or heavy goods vehicle, at a yard or lorry park and need to travel there regularly from home.
• Itinerant traders who rent lock-up premises, to store stock and equipment, but from which they do not trade and need to travel there regularly from home.
• Those providing services at more than one location, away from their home, on a regular basis such as dance teachers, and others, who run classes at a number of different locations each week.

Each such taxpayer would need to demonstrate that the home is the base of operation for the business and that the site attended is merely a place at which activities of the business are carried out. By referring to the Powell decision, practitioners with similar cases should now be better able to determine whether a client has a valid claim to tax relief in respect of such travel expenses.

Perhaps, more importantly, Inspectors may wish to think twice before opening enquiries into 'home to depot' travelling costs of a whole range of self-employed individuals. Certainly the decision in Mr Powell's favour will have left a sour taste in the Revenue's mouth.

Mike Down and Chris Jowitt are directors of tax investigations at Baker Tilly. The views expressed in this article are their own and do not necessarily reflect those of Baker Tilly. Mike and Chris are grateful for the background factual information provided by Zafar Resvi, solicitor, who acted as advocate for Mr Powell.

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