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Hot Desking in the Library
Mike Down and Mike Thexton consider whether the Revenue's strict interpretation of section 198, Taxes Act 1988 fails to take account of 'home working'.
You are sitting your final Inspector's exam. The topic is 'Self Assessment Aspect Enquiries'. The multiple choice question before you falls under the heading 'claims under section 198, Taxes Act 1988' and reads as follows:
'A director claims that he has to work from home because his company deals with overseas customers, and he needs to be available for telephone calls and e-mails at times when the office is shut. For security reasons, this has very strictly enforced opening hours and all personnel must vacate the premises by 6 pm each evening. The company provides him with a telephone line at home, which is only used for business purposes. The director has claimed a proportion of household expenses (heat, light and cleaning) to reflect the use of one of the rooms in the dwelling for business purposes. What should you do?
(A) Accept the claim without raising an aspect enquiry. You are fully satisfied with the proportion and the reality of the expense. It is essential for the director to work from home some of the time, and extra household expenses will of course be incurred in maintaining an office.
(B) Raise an aspect enquiry and seek to reject the claim in full. The Schedule E test requires that any expenses are an objective requirement of the duties of the employment, not just a matter of choice or convenience. The director does not have to do the work at home, so he does not have to incur household expenses. He could pull rank and insist that the office is kept open at all times, and could remain there to make and receive calls. Alternatively, he could do his work in a public library, incurring no expense at all.
(C) Raise an aspect enquiry and seek to reject part of the claim on the basis that most tax enquiries can be easily settled on a negotiated basis and this will improve your district's statistics.'
You now wake up. It was, of course, a nightmare, and a nasty one at that. You are not sitting an Inspector's exam, in fact you are not even an Inspector - you are a hard-pressed tax adviser struggling to cope with the increasing burden of tax enquiries under self assessment. And, what is more, no reasonable Inspector would expect a company director to make and receive telephone calls in a public library, or to require the office to stay open 24 hours a day (incurring vast extra deductible costs) and the director to remain in it all the time (incurring divorce lawyers' fees and psychiatric counselling costs, admittedly not deductible).
You then pick up a letter from the Inland Revenue and idly start to read ...
'Dear Sir
'I am writing to tell you that I intend making some enquiries into your client's 1999-2000 self assessment return.
'As you are aware, Schedule E tax is charged on the full amount of emoluments received by a director, subject only to such deductions as may be authorised by the Taxes Acts. The principal allowable deductions are found in section 198, Taxes Act 1988. Broadly this covers necessary travelling expenses and those other expenses incurred wholly, exclusively and necessarily" in the performance of the duties of the office or employment.
'Modern technology allows increasing numbers of employees to carry out some or all of the duties of their employment in their own homes. Broadly, the Revenue accepts that where an employee's home is a workplace we can permit a deduction from emoluments for the cost of travel from home to other workplaces and household expenses. However, the test set out in section 198, Taxes Act 1988 is very strict indeed and few taxpayers meet the criteria.
'The relevant case law can be summarised by two broad conditions. Both of these conditions must be met before a deduction can be permitted for household costs and for the cost of travelling from home to a permanent workplace. The tests are (a) the duties carried out at home must be substantive duties of the employment; and (b) it must be an objective requirement of the duties of the employment that the work is carried out at home and nowhere else.
'Many employees do some of their work at home because they do not have time to complete it during the working day. This is a matter of personal choice and no deduction should be permitted. Some employees work at home because the place at which they usually work has limited opening hours and they need to work outside those hours. No deduction can be permitted in these circumstances because even though the employer does not provide an alternative place (e.g. a public library or other quiet spot) at which all of the duties could be carried out, there is no obligation that the work must be carried out at home. I attach photocopies of the relevant part of the Revenue's instruction books which confirm the above.
'In conclusion, I cannot accept that your client qualifies for relief and I would ask you to kindly withdraw the claim. In the meantime, and to prevent interest accruing, you might care to let me have a cheque for the additional tax due.
'I look forward to hearing from you within 30 days.
'Yours sincerely,
'H M Inspector of Taxes'
So then, there we have it. The answer to our 'dream' exam question is Option B. The Inspector seeks to deny the claim for household expenses (heat, light, council tax, cleaning) in respect of such a director. In our client's case, one-third of the total expenditure is being claimed, because one room out of three is dedicated for use as an office. The business deals with foreigners who, tiresomely, will not observe British working hours when making phone calls. The director works all day at the office and probably half the night at home.
What is perhaps surprising is the quantity of material in the Inland Revenue manuals on the subject. The text of the letter is pretty much straight out of the Revenue instructions. The view expressed is not that of a single Inspector: it is official policy.
Let us consider the Revenue's letter in detail. On the face of it, the third paragraph is unobjectionable and has a flavour of Option A. Closely following paragraph SE32760 in the Schedule E Manual, it brackets together the deduction of travelling expenses with the deduction of household expenses, as if the same arguments exactly applied to them. This is not necessarily valid, as will be considered below.
Case law
Two tax cases are relevant - Taylor v Provan [1974] STC 168 and Pook v Owen 45 TC 571. In both of these, the taxpayer succeeded in deducting travelling expenses from home to places of employment. Emphasis is placed on the fact that:
- in Taylor, the individual (who lived in Canada) was perhaps the only person in the world who could do the job, so this was an exceptional situation;
- in Owen, the work was part-time, so the employer would necessarily have to find someone who would have other commitments elsewhere and who would therefore be 'based at home'.
It is from these cases that the Revenue's instructions (Schedule E Manual at paragraph SE32775) draw the conclusions setting out tests (a) and (b) in the Inspector's letter. But are these conclusions correct? In some ways it is remarkable to draw such sweeping conclusions from two cases about travelling expenses. Careful reading of the two cases seems only to indicate that they were about whether the travelling was 'necessarily incurred in the performance of the duties'. It would be a better summary to say that (a) it is an objective requirement of the situation that the employee has to travel in order to carry out the duties of the employment; and (b) this travel is not the 'ordinary commuting' of a normal employee between home and a normal place of work.
The following extract from Lord Cave's speech in the Taylor case is long, but is excellent, and can hardly be shortened without losing the point:
'I am sure that the majority did not intend to decide that in all cases where the employee's contract requires him to work at home he is entitled to deduct travelling expenses between his home and his other place of work. Plainly that would open the door widely for evasion of the Rule. There must be something more. I think that the distinguishing fact in Owen's case was that there was a part-time employment and that it was impossible for the employer to fill the post otherwise than by appointing a man with commitments which he would not give up. It was therefore necessary that whoever was appointed should incur travelling expenses. It was theoretically possible for Dr Owen to give up his practice and go to live in Haverfordwest. His employer would not have objected. The nearer to the hospital Dr Owen lived the better. But the majority disregarded that theoretical possibility and had regard to the realities of the situation. I do not think that there was any departure from the ratio in Ricketts' case in deciding in favour of Dr. Owen. He contracted on the basis that he would continue to live at Fishguard and be paid expenses of travelling. He would not have contracted on any other basis. And it was impossible to find an appointee who was free to avoid incurring travelling expenses.'
His Lordship was therefore concerned with the reality of the situation. The reality was that Dr Owen would not have taken the job on any other basis than one which involved extra travelling; similarly, Mr Taylor was not going to give up his residence abroad, so the fact that the company paid his travelling expenses to and from the United Kingdom was a necessary part of him carrying out his duties.
It is important that His Lordship also commented: 'I find nothing in Ricketts' case which necessarily excludes such a case'. Ricketts v Colquhoun 10 TC 118 is one of the Revenue's favourite Schedule E cases, because it established the principle that expenses must be an objective requirement of the duties of the employment, not the personal circumstances of the employee. It is likely that this case will be quoted in arguments about household expenditure.
Anyway, back to our client and specifically to household expenses, The Schedule E Manual at paragraph SE32780 develops the arguments about whether a home is a 'workplace'. It states that this will only follow where 'substantive duties of the employment' are carried out at home; these must be part of 'the duties performed ... that earn money for the ... company'. The manual states, 'In many cases it will be possible to demonstrate that any work carried out at home is preparatory and is not part of the duties of the employment at all'. That is probably in accordance with the law, although many would regard the distinction between 'preparing' and 'doing' the duties as unfair (especially the journalists in Smith v Abbott, Shuttleworth & Others, [1994] STC 237). But our director does appear to be carrying out substantive duties in making and receiving telephone calls, as well as doing other duties (which may or may not be similarly substantive) while waiting for the telephone to ring or the time difference to be right.
Flawed logic
The Schedule E Manual at paragraph SE32785 prompts the paragraph in which the public library is mentioned. Whilst the paragraph, read as a whole, may have a grain of justification at its foundation - it is true that a deduction for household expenses is probably not appropriate for everyone who does a bit of their work at home - its circular logic leads to absurd results. There is no objective requirement that the work is done anywhere, really, as long as it is done. So any expenses incurred in doing it are not deductible, because it could have been done somewhere else (possibly incurring other expenses, but those were not incurred, so they are not deductible either).
This is quite similar to an argument that travelling expenses should not be deductible on the basis that a train fare was not necessary. Clearly it would have been possible to walk, and that would have cost nothing. But it is almost worse than that: the train fare is not necessary because you could have travelled by plane; and the plane fare is not deductible because you did not incur it. No reasonable Inspector would advance such an argument (although further research in the Revenue manuals may disclose it ...).
Reality of the situation
The judgment in Pook v Owen suggests that the Revenue should consider the 'reality of the situation'. The director has substantive duties, which cannot reasonably be done in the office. They have to be done somewhere, and having an office at home is not only the most sensible and reasonable choice: it is likely to be the only one that is acceptable to the director. Applying the principles of Taylor and Owen, then, it is an objective requirement that work is done at home. The costs incurred in maintaining that 'home office' should then be deductible as a matter of principle.
One possible reason for the Revenue's intransigence concerning household expenses may be the link they make between this deduction and the allowability of travelling expenses. The cases it quotes concern travelling expenses; the household costs are deductible only if the home constitutes a 'workplace', with the implication that all travelling costs would then be allowed as travelling 'between workplaces'. This makes the stakes much higher for the Revenue than they need to be - the average director who works from home would not use the deduction of heat and light as a wedge to claim commuting costs. The home is 'a workplace', and extra costs are incurred in using it as such; but it is also a home, and commuting from there to the normal workplace is not deductible. It seems quite reasonable and logical to regard the two issues as separate, but the Revenue treats them as one.
Of course, it is also necessary to argue about the amount of costs. The case of Baird v Williams [1999] STC 635 is interesting in this context. Mr Baird was a Clerk to the General Commissioners who lived outside the United Kingdom. He acquired a house in the United Kingdom, and the Revenue accepted that he would not have done so were it not for his employment. It was accepted that the office of Clerk included an objective requirement to 'establish an office' (for the storage of the required law library and other papers); the Revenue allowed a deduction of 75 per cent (a heroic percentage, no doubt with Option C in mind!) of Mr Baird's heat and light. The case arose because the Revenue balked at the deduction of 75 per cent of the mortgage interest as well, and the Court agreed - the borrowing of money was too far removed from the performance of the duties.
Duality of purpose
It is also necessary to consider 'duality of purpose'. If the expenses are not 'wholly and exclusively incurred in the performance of the duties', then they are not deducted. The Inspector could argue that the same costs would have been incurred anyway, just through living in the house. This can be countered on technical grounds by attempting to identify the marginal costs of working from home; but, in any case, the Revenue does not normally take this point with Schedule D 'homeworkers'. This particular test should be the same for both Schedules, and fairness between taxpayers ought therefore to allow a reasonable proportion on the same basis.
If this hard line is the Revenue's attitude to home working, it seems out of step with other developments. There is a widespread view that home working should be encouraged, partly for environmental reasons. Two tax measures have been introduced to help. Firstly, Finance Act 1999 brought in an exemption for computer equipment loaned to employees, even if there is private use (section 156A). Secondly, Finance Act 2000 extended the exemption for 'accommodation, supplies or services used in performing duties of employment' (section 155ZA) to cover such provision of the employer's workplace. The exemption of the provision of mobile telephones might fall within the same category. Crucially, in these situations, it is a requirement that the employer incurs the expense rather than the employee - it is an exemption of a benefit, not the allowance of a deduction. It would be impractical to arrange for the employer to incur a third of the employee's household costs to provide an 'office at home', but that seems to be the sort of thing for which these measures should give relief.
Other taxes?
Beware a possible capital gains tax pitfall. If one room in a private house is specifically set aside for business use, upon sale the Revenue will want to see a restriction in the private residence relief. However, do not forget that any disposal ought to qualify for business assets taper relief, so after four years only 25 per cent of the chargeable gain (being a percentage of the total gain on the house) would be subject to tax. Overall, therefore, the gain is likely to be a relatively small charge on the whole profit made on the building.
The VAT status of home working is also a live issue because the VAT rules for commercial property are very different and much more complicated than those for domestic property. Where an asset such as a home has both business and private use, the VAT consequences must be split fairly and reasonably between the two. This 'apportionment' is not as simple as it sounds and much of the skill of a good tax adviser is in working out the appropriate percentages for VATable and non-business use, raising similar issues to partial exemption. This introduces the usual VAT dilemmas in a novel context. What about apportionment of toilet facilities? And how do you do that apportionment? - the usual bases are usage, floor area or numbers of personnel. Customs and Excise take a detailed look in such cases and, often, the VAT Inspector can make even the most intransigent Inspector of Taxes look like sweet reason. Still, at least the Closer Working Policy might help to clarify matters in future..!
A final thought
Finally, one other development in this area is the launching of a website devoted to 'household expense claims'. This was publicised in some national newspapers, and a delighted customer appeared in photographs to explain how he had reclaimed £300 over the last six years and received a repayment without difficulty. It is not known whether he is now finding out what an 'aspect enquiry' is. If not, he surely soon will be..!
Mike Down is a director in Baker Tilly's Tax Investigation Group. Mike Thexton is principal at Thexton Training and a leading lecturer on taxation matters. The views expressed in this article are the authors' own and do not necessarily reflect those of their organisations.
For a possible solution to the section 198 problem, the authors direct readers' attention to Taxation, 13 July 2000 at page 386 where David Whiscombe set out a licence arrangement to secure relief under Schedule A. However, this requires a level of co-operation from the employer which might not always be forthcoming.
"
Hot Desking in the Library
Mike Down and Mike Thexton consider whether the Revenue's strict interpretation of section 198, Taxes Act 1988 fails to take account of 'home working'.
You are sitting your final Inspector's exam. The topic is 'Self Assessment Aspect Enquiries'. The multiple choice question before you falls under the heading 'claims under section 198, Taxes Act 1988' and reads as follows:
'A director claims that he has to work from home because his company deals with overseas customers, and he needs to be available for telephone calls and e-mails at times when the office is shut. For security reasons, this has very strictly enforced opening hours and all personnel must vacate the premises by 6 pm each evening. The company provides him with a telephone line at home, which is only used for business purposes. The director has claimed a proportion of household expenses (heat, light and cleaning) to reflect the use of one of the rooms in the dwelling for business purposes. What should you do?
(A) Accept the claim without raising an aspect enquiry. You are fully satisfied with the proportion and the reality of the expense. It is essential for the director to work from home some of the time, and extra household expenses will of course be incurred in maintaining an office.
(B) Raise an aspect enquiry and seek to reject the claim in full. The Schedule E test requires that any expenses are an objective requirement of the duties of the employment, not just a matter of choice or convenience. The director does not have to do the work at home, so he does not have to incur household expenses. He could pull rank and insist that the office is kept open at all times, and could remain there to make and receive calls. Alternatively, he could do his work in a public library, incurring no expense at all.
(C) Raise an aspect enquiry and seek to reject part of the claim on the basis that most tax enquiries can be easily settled on a negotiated basis and this will improve your district's statistics.'
You now wake up. It was, of course, a nightmare, and a nasty one at that. You are not sitting an Inspector's exam, in fact you are not even an Inspector - you are a hard-pressed tax adviser struggling to cope with the increasing burden of tax enquiries under self assessment. And, what is more, no reasonable Inspector would expect a company director to make and receive telephone calls in a public library, or to require the office to stay open 24 hours a day (incurring vast extra deductible costs) and the director to remain in it all the time (incurring divorce lawyers' fees and psychiatric counselling costs, admittedly not deductible).
You then pick up a letter from the Inland Revenue and idly start to read ...
'Dear Sir
'I am writing to tell you that I intend making some enquiries into your client's 1999-2000 self assessment return.
'As you are aware, Schedule E tax is charged on the full amount of emoluments received by a director, subject only to such deductions as may be authorised by the Taxes Acts. The principal allowable deductions are found in section 198, Taxes Act 1988. Broadly this covers necessary travelling expenses and those other expenses incurred "wholly, exclusively and necessarily" in the performance of the duties of the office or employment.
'Modern technology allows increasing numbers of employees to carry out some or all of the duties of their employment in their own homes. Broadly, the Revenue accepts that where an employee's home is a workplace we can permit a deduction from emoluments for the cost of travel from home to other workplaces and household expenses. However, the test set out in section 198, Taxes Act 1988 is very strict indeed and few taxpayers meet the criteria.
'The relevant case law can be summarised by two broad conditions. Both of these conditions must be met before a deduction can be permitted for household costs and for the cost of travelling from home to a permanent workplace. The tests are (a) the duties carried out at home must be substantive duties of the employment; and (b) it must be an objective requirement of the duties of the employment that the work is carried out at home and nowhere else.
'Many employees do some of their work at home because they do not have time to complete it during the working day. This is a matter of personal choice and no deduction should be permitted. Some employees work at home because the place at which they usually work has limited opening hours and they need to work outside those hours. No deduction can be permitted in these circumstances because even though the employer does not provide an alternative place (e.g. a public library or other quiet spot) at which all of the duties could be carried out, there is no obligation that the work must be carried out at home. I attach photocopies of the relevant part of the Revenue's instruction books which confirm the above.
'In conclusion, I cannot accept that your client qualifies for relief and I would ask you to kindly withdraw the claim. In the meantime, and to prevent interest accruing, you might care to let me have a cheque for the additional tax due.
'I look forward to hearing from you within 30 days.
'Yours sincerely,
'H M Inspector of Taxes'
So then, there we have it. The answer to our 'dream' exam question is Option B. The Inspector seeks to deny the claim for household expenses (heat, light, council tax, cleaning) in respect of such a director. In our client's case, one-third of the total expenditure is being claimed, because one room out of three is dedicated for use as an office. The business deals with foreigners who, tiresomely, will not observe British working hours when making phone calls. The director works all day at the office and probably half the night at home.
What is perhaps surprising is the quantity of material in the Inland Revenue manuals on the subject. The text of the letter is pretty much straight out of the Revenue instructions. The view expressed is not that of a single Inspector: it is official policy.
Let us consider the Revenue's letter in detail. On the face of it, the third paragraph is unobjectionable and has a flavour of Option A. Closely following paragraph SE32760 in the Schedule E Manual, it brackets together the deduction of travelling expenses with the deduction of household expenses, as if the same arguments exactly applied to them. This is not necessarily valid, as will be considered below.
Case law
Two tax cases are relevant - Taylor v Provan [1974] STC 168 and Pook v Owen 45 TC 571. In both of these, the taxpayer succeeded in deducting travelling expenses from home to places of employment. Emphasis is placed on the fact that:
- in Taylor, the individual (who lived in Canada) was perhaps the only person in the world who could do the job, so this was an exceptional situation;
- in Owen, the work was part-time, so the employer would necessarily have to find someone who would have other commitments elsewhere and who would therefore be 'based at home'.
It is from these cases that the Revenue's instructions (Schedule E Manual at paragraph SE32775) draw the conclusions setting out tests (a) and (b) in the Inspector's letter. But are these conclusions correct? In some ways it is remarkable to draw such sweeping conclusions from two cases about travelling expenses. Careful reading of the two cases seems only to indicate that they were about whether the travelling was 'necessarily incurred in the performance of the duties'. It would be a better summary to say that (a) it is an objective requirement of the situation that the employee has to travel in order to carry out the duties of the employment; and (b) this travel is not the 'ordinary commuting' of a normal employee between home and a normal place of work.
The following extract from Lord Cave's speech in the Taylor case is long, but is excellent, and can hardly be shortened without losing the point:
'I am sure that the majority did not intend to decide that in all cases where the employee's contract requires him to work at home he is entitled to deduct travelling expenses between his home and his other place of work. Plainly that would open the door widely for evasion of the Rule. There must be something more. I think that the distinguishing fact in Owen's case was that there was a part-time employment and that it was impossible for the employer to fill the post otherwise than by appointing a man with commitments which he would not give up. It was therefore necessary that whoever was appointed should incur travelling expenses. It was theoretically possible for Dr Owen to give up his practice and go to live in Haverfordwest. His employer would not have objected. The nearer to the hospital Dr Owen lived the better. But the majority disregarded that theoretical possibility and had regard to the realities of the situation. I do not think that there was any departure from the ratio in Ricketts' case in deciding in favour of Dr. Owen. He contracted on the basis that he would continue to live at Fishguard and be paid expenses of travelling. He would not have contracted on any other basis. And it was impossible to find an appointee who was free to avoid incurring travelling expenses.'
His Lordship was therefore concerned with the reality of the situation. The reality was that Dr Owen would not have taken the job on any other basis than one which involved extra travelling; similarly, Mr Taylor was not going to give up his residence abroad, so the fact that the company paid his travelling expenses to and from the United Kingdom was a necessary part of him carrying out his duties.
It is important that His Lordship also commented: 'I find nothing in Ricketts' case which necessarily excludes such a case'. Ricketts v Colquhoun 10 TC 118 is one of the Revenue's favourite Schedule E cases, because it established the principle that expenses must be an objective requirement of the duties of the employment, not the personal circumstances of the employee. It is likely that this case will be quoted in arguments about household expenditure.
Anyway, back to our client and specifically to household expenses, The Schedule E Manual at paragraph SE32780 develops the arguments about whether a home is a 'workplace'. It states that this will only follow where 'substantive duties of the employment' are carried out at home; these must be part of 'the duties performed ... that earn money for the ... company'. The manual states, 'In many cases it will be possible to demonstrate that any work carried out at home is preparatory and is not part of the duties of the employment at all'. That is probably in accordance with the law, although many would regard the distinction between 'preparing' and 'doing' the duties as unfair (especially the journalists in Smith v Abbott, Shuttleworth & Others, [1994] STC 237). But our director does appear to be carrying out substantive duties in making and receiving telephone calls, as well as doing other duties (which may or may not be similarly substantive) while waiting for the telephone to ring or the time difference to be right.
Flawed logic
The Schedule E Manual at paragraph SE32785 prompts the paragraph in which the public library is mentioned. Whilst the paragraph, read as a whole, may have a grain of justification at its foundation - it is true that a deduction for household expenses is probably not appropriate for everyone who does a bit of their work at home - its circular logic leads to absurd results. There is no objective requirement that the work is done anywhere, really, as long as it is done. So any expenses incurred in doing it are not deductible, because it could have been done somewhere else (possibly incurring other expenses, but those were not incurred, so they are not deductible either).
This is quite similar to an argument that travelling expenses should not be deductible on the basis that a train fare was not necessary. Clearly it would have been possible to walk, and that would have cost nothing. But it is almost worse than that: the train fare is not necessary because you could have travelled by plane; and the plane fare is not deductible because you did not incur it. No reasonable Inspector would advance such an argument (although further research in the Revenue manuals may disclose it ...).
Reality of the situation
The judgment in Pook v Owen suggests that the Revenue should consider the 'reality of the situation'. The director has substantive duties, which cannot reasonably be done in the office. They have to be done somewhere, and having an office at home is not only the most sensible and reasonable choice: it is likely to be the only one that is acceptable to the director. Applying the principles of Taylor and Owen, then, it is an objective requirement that work is done at home. The costs incurred in maintaining that 'home office' should then be deductible as a matter of principle.
One possible reason for the Revenue's intransigence concerning household expenses may be the link they make between this deduction and the allowability of travelling expenses. The cases it quotes concern travelling expenses; the household costs are deductible only if the home constitutes a 'workplace', with the implication that all travelling costs would then be allowed as travelling 'between workplaces'. This makes the stakes much higher for the Revenue than they need to be - the average director who works from home would not use the deduction of heat and light as a wedge to claim commuting costs. The home is 'a workplace', and extra costs are incurred in using it as such; but it is also a home, and commuting from there to the normal workplace is not deductible. It seems quite reasonable and logical to regard the two issues as separate, but the Revenue treats them as one.
Of course, it is also necessary to argue about the amount of costs. The case of Baird v Williams [1999] STC 635 is interesting in this context. Mr Baird was a Clerk to the General Commissioners who lived outside the United Kingdom. He acquired a house in the United Kingdom, and the Revenue accepted that he would not have done so were it not for his employment. It was accepted that the office of Clerk included an objective requirement to 'establish an office' (for the storage of the required law library and other papers); the Revenue allowed a deduction of 75 per cent (a heroic percentage, no doubt with Option C in mind!) of Mr Baird's heat and light. The case arose because the Revenue balked at the deduction of 75 per cent of the mortgage interest as well, and the Court agreed - the borrowing of money was too far removed from the performance of the duties.
Duality of purpose
It is also necessary to consider 'duality of purpose'. If the expenses are not 'wholly and exclusively incurred in the performance of the duties', then they are not deducted. The Inspector could argue that the same costs would have been incurred anyway, just through living in the house. This can be countered on technical grounds by attempting to identify the marginal costs of working from home; but, in any case, the Revenue does not normally take this point with Schedule D 'homeworkers'. This particular test should be the same for both Schedules, and fairness between taxpayers ought therefore to allow a reasonable proportion on the same basis.
If this hard line is the Revenue's attitude to home working, it seems out of step with other developments. There is a widespread view that home working should be encouraged, partly for environmental reasons. Two tax measures have been introduced to help. Firstly, Finance Act 1999 brought in an exemption for computer equipment loaned to employees, even if there is private use (section 156A). Secondly, Finance Act 2000 extended the exemption for 'accommodation, supplies or services used in performing duties of employment' (section 155ZA) to cover such provision of the employer's workplace. The exemption of the provision of mobile telephones might fall within the same category. Crucially, in these situations, it is a requirement that the employer incurs the expense rather than the employee - it is an exemption of a benefit, not the allowance of a deduction. It would be impractical to arrange for the employer to incur a third of the employee's household costs to provide an 'office at home', but that seems to be the sort of thing for which these measures should give relief.
Other taxes?
Beware a possible capital gains tax pitfall. If one room in a private house is specifically set aside for business use, upon sale the Revenue will want to see a restriction in the private residence relief. However, do not forget that any disposal ought to qualify for business assets taper relief, so after four years only 25 per cent of the chargeable gain (being a percentage of the total gain on the house) would be subject to tax. Overall, therefore, the gain is likely to be a relatively small charge on the whole profit made on the building.
The VAT status of home working is also a live issue because the VAT rules for commercial property are very different and much more complicated than those for domestic property. Where an asset such as a home has both business and private use, the VAT consequences must be split fairly and reasonably between the two. This 'apportionment' is not as simple as it sounds and much of the skill of a good tax adviser is in working out the appropriate percentages for VATable and non-business use, raising similar issues to partial exemption. This introduces the usual VAT dilemmas in a novel context. What about apportionment of toilet facilities? And how do you do that apportionment? - the usual bases are usage, floor area or numbers of personnel. Customs and Excise take a detailed look in such cases and, often, the VAT Inspector can make even the most intransigent Inspector of Taxes look like sweet reason. Still, at least the Closer Working Policy might help to clarify matters in future..!
A final thought
Finally, one other development in this area is the launching of a website devoted to 'household expense claims'. This was publicised in some national newspapers, and a delighted customer appeared in photographs to explain how he had reclaimed £300 over the last six years and received a repayment without difficulty. It is not known whether he is now finding out what an 'aspect enquiry' is. If not, he surely soon will be..!
Mike Down is a director in Baker Tilly's Tax Investigation Group. Mike Thexton is principal at Thexton Training and a leading lecturer on taxation matters. The views expressed in this article are the authors' own and do not necessarily reflect those of their organisations.
For a possible solution to the section 198 problem, the authors direct readers' attention to Taxation, 13 July 2000 at page 386 where David Whiscombe set out a licence arrangement to secure relief under Schedule A. However, this requires a level of co-operation from the employer which might not always be forthcoming.
