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KEY POINTS
- Duality of purpose.
- The impact of the decision in Mallalieu v Drummond.
- Where is the dividing line between allowable and non-allowable?
- Opening the floodgates?
- Is the House of Lord's decision in Mallalieu right?
A recent Readers' Forum query concerned a musician who required medical treatment for piano playing-related injuries.
This started me thinking about 'duality of purpose' and where the dividing line between allowable and non-allowable expenses is drawn. I then also remembered that Michael Winner had experienced an investigation by HMRC on a similar subject.
As you may know, Mr Winner writes a weekly column for The Sunday Times as a restaurant critic: Winner's Dinners.
The question that no doubt naturally occurs to you — and naturally occurred to HMRC — was whether the cost of the meals is tax deductible.
Now we would not normally discuss the tax affairs of a named individual in Taxation, but we will make an exception for Mr Winner as he has already discussed this tax 'dispute' in various national newspapers.
See for instance 'My lunatic battle with the idiotic Mr Kain of the Tyne and Wear tax office': Daily Mail, 23 November 2007.
There is probably a separate article to be written on the ethics of using the national press to attack a civil servant — who will not be able to reply — regarding a personal matter, but I digress.
Live to eat?
As you can probably tell by the title of his article in the Mail, Mr Winner was not enamoured of HMRC's suggestions regarding the nature of the meals. I assume that Mr Winner is a self-employed freelance writer. His article says:
'Mr Kain took what I considered the near-lunatic view that if I went to a restaurant to review it for a newspaper column I write, the meal was not tax deductible as I had to eat to live and, therefore, there was duality of purpose that wiped out my right to claim it as a legitimate business expense.
'Mr Kain suggested the meals could not be deductible because "the costs cannot be said to have been incurred wholly and exclusively in the performance of your duties, when a secondary motive, or even an unconscious one, is to satisfy the need to eat to live".
'Food critics have to go out to eat. They have no choice. Unlike most citizens, they don't eat to satisfy their need to live. They eat to produce articles for their editor.
'No other food critic in the land was afflicted by such twisted thinking as Mr Kain's.'
Perhaps no other food critics thought this way, but I can't believe that I and Mr Kain are the only tax people who might; and I must admit that I am having some difficulty in seeing what is wrong with Mr Kain's argument.
And if Mr Winner's statement that 'my Colin Kain investigation was settled after two years of haggling on most minor points, none of which produced one penny extra tax for the nation' is correct, then did he get off lightly?
Or eat to live?
Perhaps the most interesting part of the article is where Mr Winner says of Mr Kain that 'he actually suggested that if I had to write about a restaurant meal when I was not hungry, he might consider it deductible. What planet was this idiot on?'.
'Planet HMRC' or perhaps 'Planet Caillebotte v Quinn' might be the answer. In that case ([1975] STC 265), Lord Templeman noted that the taxpayer, like any other, must eat to live and no part of his lunch was laid out 'wholly and exclusively for the purposes of his trade'.
However, he did note that the cost of a cup of tea drunk by an actor in a play of the Mad Hatter's tea party might be allowed on the basis that quenching his thirst would be incidental to playing the part.
So while Mr Kain's question might seem strange to Mr Winner, perhaps to many tax practitioners it will be perfectly logical. If the critic had a full stomach, would one have a stronger argument that he was not receiving a personal benefit from the expense?
Of course, if he was so full that he could not eat the dinner then that would make writing a restaurant review more difficult; but if he did manage to force down three courses and a glass or two of vino and thus write the article, one might — I suppose — still argue that the consequent calorific intake would be the personal benefit.
Do the clothes fit?
Probably the best known case on this subject is Mallalieu v Drummond [1983] STC 665, where a female barrister purchased black and white clothes to wear in court as required by the Bar Council. Her personal preference was for more brightly coloured clothing and she therefore claimed a tax deduction for the cost of these 'work' clothes.
Lord Brightman explained that 'the words… "expended for the purposes of the trade, profession or vocation" mean in my opinion "expended to serve the purposes of the trade, profession or vocation"; or… "for the purpose of enabling a person to carry on and earn profits in the trade, etc". The particular words emphasised do not refer to "the purposes" of the taxpayer as some of the cases appear to suggest. They refer to "the purposes" of the business which is a different concept although the "purposes" (i.e. the intentions or objects) of the taxpayer are fundamental to the application of the paragraph'.
He continued 'if it appears that the object of the taxpayer at the time of the expenditure was to serve two purposes, the purposes of his business and other purposes, it is immaterial to the application of s 130(a) that the business purposes are the predominant purposes intended to be served'.
This all seems clear, but to my mind does a matter of doubt then creep in with his next sentence? 'The object of the taxpayer in making the expenditure must be distinguished from the effect of the expenditure.'
Lord Brightman then gives the example of 'a medical consultant who 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 on 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. T
his 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 on his patient, his stay on the Riviera was an unavoidable effect of the expenditure on the journey and the expenditure lies outside the prohibition in s 130'.
Warmth and decency
But was not the 'natural warmth and decency' afforded by Ms Mallalieu's dark clothing an 'unavoidable effect' of her having to wear such clothes to comply with Bar Council rules?
In the same way that it would be impractical for the restaurant critic to eat a meal to satisfy his hunger at his own expense before then consuming a tax deductible meal for the purposes of his review, presumably it would have been impractical for her to have worn her own brightly coloured clothes underneath to satisfy the former requirement, with the dark clothes on top to comply with the latter.
It seems to me that the personal 'satisfaction' (covering one's nakedness or satisfying one's hunger) afforded by the clothes and the food are both either 'unavoidable effects' or they are both objects (albeit secondary) of the taxpayer.
The dividing line
This is where I start to have difficulty in determining the dividing line. In fact the opening summary paragraph of the Simon's Tax Cases report on Mallalieu reads as follows, but I have inserted in square brackets words that I feel relate to Mr Winner's claim.
For the sake of simplicity and with apologies to Mr Winner I have retained the term 'her' and have assumed that food provides 'warmth and decency' internally in the same way that clothes do externally.
'But for the requirements of her profession that she should be so clothed [fed] ... the taxpayer would not have purchased those clothes [meals]. The taxpayer had an ample supply of other clothes [meals] to keep her in comfort and decency. The preservation of warmth and decency was not a consideration which crossed her mind when she bought the clothes [meals].'
In his concluding paragraphs, Lord Brightman refers to Norman v Golder 26 TC 293. In that case, Mr Norman (as in our Readers' Forum query and as in Prince v Mapp 46 TC 169) claimed a tax deduction for medical expenses incurred in treating an illness which he stated was a direct result of his working conditions.
Lord Green rejected the claim. Coincidentally, his judgment in 1944, although predating the Mallalieu case and Mr Winner (who, being only eight years old at the time, presumably took little interest in such matters), did refer to expenditure on food and clothing.
'True it is that if you do not get yourself well and so incur expenses to doctors you cannot carry on your trade or profession, and if you do not carry on your trade or profession you will not earn an income, and if you do not earn an income the Revenue will not get any tax.
'The same thing applies to the food you eat and the clothes that you wear. But expenses of that kind are not wholly and exclusively laid out for the purposes of the trade, profession or vocation. They are laid out in part for the advantage and benefit of the taxpayer as a living human being.'
Dinner and dichotomies
Of course, once one does start to consider this subject, dichotomies do start to crop up.
HMRC's Business Income Manual at BIM50160 refers to 'Actors and other entertainers: expenses'.
The paragraph headed Clothing refers to Mallalieu and states that 'a self-employed person could not claim a deduction for the cost of "a wardrobe of everyday clothes" even if they were used solely for work. There is an inevitable non-business purpose in the acquisition of such clothing: the provision of warmth and decency'.
However, the Business Income Manual then goes on: 'The Mallalieu decision does not mean that the cost of clothing is always disallowed. BIM37910 gives examples of the costs of a "uniform" or protective clothing. The cost of clothing acquired for a film, stage or TV performance is also allowable. The clothing in such event is not part of "an everyday wardrobe"; it is "costume" used in a performance'.
HMRC then give the example of a self-employed television interviewer who can deduct the costs of a lounge suit acquired solely for use before the cameras ('it is the interviewer's "costume"'). However, a self-employed architect who buys a suit to create a good impression while being interviewed on television may not have a deduction for the cost. 'The suit is not a self-employed performer's costume'.
I would hazard a guess that many trial lawyers would consider that what they do is a 'performance', and is this really any different from the ('put on a white coat and you are a doctor syndrome') position when a professional person wears a £3,000 suit to meet and advise clients even though his advice would be exactly the same as when wearing his 'off duty' t-shirt and jeans?
Furthermore, I would argue (and I am sure that Rufus would agree) that much journalism now is 'performance journalism' — robust views with which the readership will strongly agree or disagree.
Perhaps Jeremy Clarkson is a prime example and I would suggest that Winner's Dinners would probably fall into that category. What if Mr Clarkson combines a road test with a visit to a friend? If he has to fill up while test driving a car for a review, is he able to get a tax deduction for the cost of that fuel?
Maas and meals
Robert Maas considers this subject in his book, Taxation of Employments. 'It should be borne in mind that the test is a motive test, "why was the expenditure incurred?" If the motive was solely a business motive, it does not matter that the taxpayer may obtain a personal benefit as a side effect of the expenditure.' For example, visiting a friend while on a business trip.
But was this not the position in Mallalieu? According to Robert, no. He says that 'even the Mallalieu decision does not breach this principle; it merely stresses that the professed motive for incurring an expense may not be the sole motive.'
In Mallalieu, the other motive was 'warmth and decency' although why visiting the friend was not also a motive rather than a side effect might cause one difficulty.
Perhaps this is where HMRC might have had similar difficulty with Mr Winner's claim.
For example, I note that in The Sunday Times of 13 July 2008, Mr Winner reviews a restaurant by Lake Lucerne — not somewhere that most of us will nip out to for a quick bite perhaps.
However, this was a stop on a six-day 'divorceymoon' trip to Switzerland which, in the words of the Mail's article on the subject, was 'to help Cleese come to terms with the collapse of his third marriage'.
Similarly, on 20 July, he reviews a restaurant somewhere nearer to home (Slaley Hall in Northumberland) stating, 'I stayed there the night before our unveiling ceremony' — this relating to a memorial to a police officer.
What do we have here, motive or effect? This sounds very much like duality of purpose to me.
Or could one argue that it is merely subsistence? In the first case deductible as business expenses against the costs of writing an article about touring round Europe with John Cleese. And in the second…?
Is he paid for his work for the Police Memorials Trust. Perhaps not? Or is it deductible as a subsistence expense incurred in writing an article about the unveiling and/or the review of Slaley Hall (not a glowing review in case you are interested).
But is there a 'warmth and decency' duality of purpose to the cost of the hotel room itself?
Furthermore, exactly why is overnight subsistence allowable in the first place? Surely this has duality of purpose?
Actor's expenses
HMRC also refer to the costs of costume and grooming incurred by a performer making 'personal appearances' to promote his business activities. They posit the example where 'a film actress may acquire an evening gown solely for the purpose of attending the premiere performance of her latest film. The cost of the gown is allowable.
The later private use of a gown, which as a question of fact was bought solely for use at a premiere or other such occasion, does not result in disallowance of the expenditure. But if the actress bought the gown with a view to use both at the premiere and on other private occasions, no deduction is due'. Again, what about 'natural warmth and decency'? Although from looking at some opening night photos…
I think I may understand HMRC's approach to cosmetic surgery even less. As mentioned, it has been held that 'health-related surgical, hospital and medical expenses are inadmissible deductions in computing profits' (BIM50160).
However, HMRC then say that 'some performers may, however, be able to show that expenditure on cosmetic surgery has been incurred solely for professional purposes. Such expenditure may be allowed'.
HMRC provide an example:
'A radio performer of many years experience starts to do TV work. She is advised that her irregular teeth are holding back her TV work. She has cosmetic dentistry to give her a perfect smile. It is established as fact that she had been content with her appearance and the TV work was the sole reason for the dentistry. The cost is allowable.'
It seems to me that appearance is quite subjective; after all is not 'beauty in the eye of the beholder'? However, if it is making the person more attractive, surely this is likely to have (ahem) other non-work related benefits?
How can this be allowable, yet the cost of an operation such as in Prince v Mapp — where without it the taxpayer would not just be 'held back', but would be unable to carry on his vocation — not be allowed?
Presumably in Prince, the guitarist could not deny that he used his finger for non-business purposes, whereas the non-business benefits of cosmetic surgery and thus the 'duality of purpose' are harder to prove.
I suppose this means that the bosom-enlarging and reduction operations of celebrities such as Jordan and Kerry Katona are allowable for tax purposes on the basis that without them their appearance in popular magazines is being, in HMRC's terminology, 'held back'?
Perhaps the one factor that has not been mentioned, but which was alluded to in Mallalieu is the 'floodgates' argument. If we allow this claim, where will it end? Lord Brightman acknowledged:
'If the argument for the taxpayer is right, it will be open to every self-employed person to set against his gross income the cost of the upkeep of a complete wardrobe of clothes, so long as he reserves such clothes strictly for use only at work, or when proceeding to and from his work.'
The numbers of those able to claim the cost of clothes for theatrical or TV performances, or indeed food for their business as a restaurant critic, are obviously much smaller than the general self-employed population.
Conclusion
So if case law was in their favour, why did HMRC allow the expenditure on the Michael Winner's meals? It's quite well known that the department will take famous people to court if they believe that there has been tax evasion on the grounds that the publicity of a high profile case — like a public execution of yore — can serve to 'encourage the others'.
I do wonder whether HMRC might have felt that taking this case to the Commissioners, and possibly further, could — in view of Mr Winner's journalistic career and the possible press coverage — have backfired.
Another possibility of course is that Mallalieu was wrongly decided. After the General Commissioners found for HMRC, the High Court judge, three Court of Appeal judges and a dissenting House of Lords judge found for the taxpayer. Of no legal effect, but a 5-4 'moral' victory for the taxpayer.
Perhaps the ultimate reality is that HMRC can use Mallalieu to refuse pretty much any claim where 'the many' (say those who wear a suit to work) might be involved and where 'duality' could be argued, but are less likely to do so when only a few (e.g. food critics and television presenters, say) are involved.
Unfair? Possibly, but since when has the tax system — or life, as Mr Winner would probably agree — ever been fair?
Can I see the menu, please?
We have asked Mr Winner and HMRC for their comments. If comments are received, we will advise and add them below.
