Mellor v Revenue & Customs [2011] UKFTT 29 (TC) (30 December 2010)

DECISION

1. This is an appeal against the Amendment made to Mr Mellor’s self assessment for the year of assessment 2006 – 2007. The Amendment was issued on 6 August 2009 and increased Mr Mellor’s taxable income by £15,895 made up of £8625 omitted income and £7270 disallowed motor expenses. This appeal concerns only the disallowed motor expenses because the matter of omitted income has been agreed. The decision to disallow the motor expenses was reviewed by HMRC and the review was completed and the outcome communicated to Mr Mellor in a letter dated 20 November 2009 written by Mr Colin Ward, Appeals and Review Unit of HMRC. The review concluded that although Mr Mellor did some work at home it did not make that location the place where he exercised his trade as an electrician nor the expense of journeys undertaken from there allowable. Mr Mellor appealed against this conclusion.

2. Mr Derek James, Accountant, appeared for Mr Mellor and Mrs Pauline Carney, officer with HMRC appeared for the Respondents. Although Mr Mellor attended the hearing he did not give oral evidence. We were supplied with a bundle containing correspondence between HMRC and Mr James.

3. Mr Mellor lives in Ruislip, Middlesex. He is a self employed electrician and carries out electrical work on sites at varying distances from Ruislip. He travels from his home to those sites by motor car and has claimed motor expenses for the journeys. He says that his home in Ruislip was also the base for his work so that the expense of travel to the sites was incurred wholly and exclusively for the purpose of his trade as an electrician and should be allowed as a deduction in calculating the profits of his trade. He relies upon the decision of the Court of Appeal in Horton v. Young (HM Inspector of Taxes) 47 TC 60 which he says supports this conclusion. The Respondents say that, although Mr Mellor might do some work at home connected with his business, it was not the location where he exercised his trade as an electrician and this being so the journeys from his home in Ruislip to the various sites were not incurred wholly and exclusively for the purposes of the trade and accordingly the expense incurred by Mr Mellor in making these journeys would not be allowed as a deduction because of the provisions of section 34(1)(a) Income tax (Trading and Other Income) Act 2005 and that the facts of the case of Horton v. Young were different and do not assist Mr Mellor.

The statutory provision

4. Section 34 Income Tax (Trading and Other Income) Act 2005 provides as follows:

“Chapter 4

Trade profits: rules restricting deductions

Wholly and exclusively and losses rules

34 Expenses not wholly and exclusively for trade and unconnected losses

(1) In calculating the profits of a trade, no deduction is allowed for –

(a) expenses not incurred wholly and exclusively for the purposes of the trade, or

(b) losses not connected with or arising out of the trade

(2) If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes if the trade”

It was agreed that (2) was not relevant in this case; the motor expense was either wholly and exclusively incurred for the purposes of Mr Mellor's business or it was not allowable at all. It was also agreed that it was for Mr Mellor to show that the expense was so incurred.

The facts

5. The facts we were able to find with confidence are few but we did establish that the following facts are not disputed. Mr Mellor was a self employed electrician in the period in question and he has no separate office outside his home. Most of his work is in the construction industry. He is qualified to undertake domestic work but does very little of this because it is less well paid than the work he does for the construction industry. His method of working is to contact contractors known to him and tell them of his availability; alternatively he is approached directly by contractors for whom he has previously worked. He then receives an invitation to quote from those contractors who have work suitable for him. The invitation is accompanied by electrical drawings to assist him in preparing his quote and he does this preparatory work at home although he sometimes makes a site visit as well. It is usual for him to suggest the most cost effective way of approach and installation of the electrical work involved. The quote does not include the cost of materials which are usually sourced by the contractors. If his quote is accepted he draws up a contract but he was unable to show us an example from the period in question. He does not visit the contractors’ offices and any discussion is conducted on the telephone. All records of all business operations are maintained at his office at home which is the only address used by him for business. In his quote he builds in costs of parking near the site and costs generally involved in travelling. He provides small tools and equipment which belong to him and which he brings home with him each evening. All correspondence is sent to his home address which is also shown on his public liability insurance policy and he arranges the renewal of that from home. He is responsible for completing the work within the time frame specified but his hours are not dictated by the contractor and the progress of the construction work dictates whether he is able to work at any time.

6. It was impossible to conclude for what purpose the Appellant made the journeys for which the expenses were claimed. Total motor costs for the year in question were itemised in a letter dated 5 January 2009 from Mr James to HMRC. This showed 10800 miles of travel to the Canary Wharf area based on 60 miles a day, 6 days a week for 30 weeks and miscellaneous days of travel in the Southern Counties totalling 50 days of travel each of 6 days per week for 20 weeks. The total cost for these was calculated using a mileage allowance basis and totalled £5700 and parking charges amounting to £1440 and congestion charges of £130 were claimed as well. The letter explained that the daily records maintained by Mr Mellor could not be found but that Mr Mellor was “forever travelling to sites for the assessment of work and then to complete the tasks agreed”. In further correspondence before us and on being asked by HMRC for addresses of sites where he actually worked, Mr James replied in writing on behalf of Mr Mellor that the main ones were New Street Square, London, Queen Anne Mews, Harley Street, London, Dufores Place Soho, London, Twickenham Rugby ground, Middlesex, Edgware, London and St Johns Wood, London. No mention was made of Canary Wharf and the first three sites are at addresses in Central London and the last one is north of Central London. Subsequently a further list of sites where Mr Mellor worked in the year in question was provided by Mr James. This list included the sites already mentioned and also sites in Knightsbridge, Central London, Chilton Street, Central London, Abingdon, London SW1 and Ruislip High School – presumably in or near Ruislip. The copy we were shown of Mr Mellor’s tax return for 2006-2007 also had attached to it the Construction Industry Tax payment vouchers. These vouchers showed that there were two main contractors for whom Mr Mellor worked during the year although it is impossible to judge from the vouchers how many different jobs were worked on for these contractors in the period or indeed where the work was carried out. Nothing made clear why Mr Mellor travelled so extensively to the Canary Wharf and Southern Counties areas in that period although it is possible that the description “Southern Counties” was intended to cover Central London. It is impossible to establish why the various journeys were undertaken. We can speculate that some may have been to carry out projects for which quotes had been accepted, some may have been to inspect sites with a view to making quotes and some may have been to return home during a day when a project had completed or could not be worked on that day in which case Mr Mellor may have used the rest of that day to seek further work by contacting the Contractor to see what was available. All of this is conjecture.

Submissions

7. The submissions were as follows. Mr James submitted that Mr Mellor used his home as his base of operations where he prepared quotes, used the phone to contact main contractors, kept his tools and equipment and has no other main place of work and that his circumstances fall within the parameters laid out by the Court of Appeal in the case of Horton v Young and that the expenses claimed should not be disallowed. For the Respondents, Mrs Carney submitted that the use of his home as described did not make it an office, that it was his home from which he made telephone calls, that his record keeping was minimal and that the facts were different from those in Horton v. Young. In particular there was no evidence that he was a team leader as Mr Horton had been, he had no meetings at home as Mr. Horton had held with the main contractor, he did not negotiate with the contractors and there was no evidence that he might have to move from site to site on a daily basis so that he had to return home to establish where he was to work the following day. Mrs Carney referred to various statements made in the case of Horton v. Young in support of her submissions and we deal with those below. In conclusion she submitted that the expenses were incurred to allow him to travel from home to work and should be disallowed for the reasons given in Newsom v. Robertson and that Mr Mellor had failed to discharge the burden of proof in showing on a balance of probabilities that the expenses are deductible as being wholly and exclusively for the purpose of his business.

Authorities

8. The arguments in this case turn on the proper application of the principles discussed in the case of Horton v Young (“Horton’s case”) which in turn largely depended upon the proper application of the principles in Newsom v. Robertson [1953] Ch.7 (“Newsom’s case”). That being so we set out below at some length extracts from the judgements in Horton's case and in particular where they compare that case with Newsom’s case.

9. Horton’s case involved a bricklayer carrying on a business on his own account who entered into contracts with a builder and main contractor for bricklaying at various sites within 55 miles of his home and he worked on each site for three weeks or so. There was no office on the sites and he contracted for work, wrote up his books and kept his tools at home. He travelled to the sites in his car in which he conveyed the other members of his team and one third of his total expenses were attributable to travelling between sites and the balance to travelling to and from his home. All the contracts were verbal and the records consisted principally of a bank account into which the cheques were paid weekly and he kept a handwritten notebook to record cash transactions. At his house was a lounge in which he had an office table, a typewriter and a number of files for keeping business papers. He did not have a telephone and the lounge was not used exclusively for business purposes. His home was where the main contractor knew he could find him. In that case the expenses of travel between his home and the various sites were held to be allowable. In Newsom’s case the taxpayer was a member of the Chancery bar with chambers in Lincoln’s Inn and a home in Whipsnade. He maintained a law library at home and made use of his home for professional work to the extent he worked there in the evenings during term-time and he also worked there in vacations when he would not normally be in chambers. The expenses of travel between Whipsnade and London were held not to be allowable.

10. In the High Court, Brightman J, in deciding in favour of Mr Horton said that the test to be applied in determining whether the costs were deductible was formulated by Denning L.J. in Newsom's case at page 16 as follows:

“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 operations 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.”

11. The court in Newsom’s case went on to hold that the fact of Mr Newsom working in his house in Whipsnade did not assimilate the case to that of a man who possessed two places of business so that his travel from one to the other was in furtherance of his business activities. Romer L.J. at pages 16-17 and in agreeing that Mr Newsom’s costs were not deductible referred to what Lord Simonds said in Smith’s Potato Estates Ltd v Bolland (1948) 30TC 267, at p.292 that the morning journey there was “undertaken for the purpose of neutralising the effect of his departure from his place of business, for private purposes, on the previous evening. In other words, the object of the journeys, both morning and evening is not to enable a man to do his work but to live away from it.”

12. The argument put forward in Horton’s case was that the taxpayer’s place of business was the site on which from time to time he worked so that each time he returned home he was travelling from his place of business to his home and vice versa when he made the return journey the following day. The decision of Brightman J was upheld by the Court of Appeal. In particular Lord Denning said at 47 TC at 71 having considered the facts of Newsom’s case:

“The present case is very different. Mr. Horton’s base of operations was Eastbourne. He claims his travelling expenses to and fro that base. I think he is entitled to deduct them. Mr Heyworth Talbot in his reply put the position very neatly. He said "If the locus in quo of the trade was Eastbourne and his trade really radiated from Eastbourne as a centre I admit the travelling expenses would be deductible.”. But Mr. Heyworth Talbot went on to urge that the locus in quo of Mr. Horton’s trade was not Eastbourne or a house in Eastbourne but was a shifting base from one building site to another; and on that account the only expenses that could be deducted were the travelling between sites. I do not think that is the right view. On the finding of the Commissioners there is only one reasonable inference to draw from the primary facts. It is that Mr Horton’s house at Eastbourne was the locus in quo of the trade from which it radiated as a centre. He went from it to the surrounding sites according as his work demanded.”

12. In agreeing with Lord Denning, Lord Salmon said at p72 in Horton’s case

“I agree. If one thing is clear, it is that a man who carries on the trade of a bricklaying subcontractor cannot do so without entering into sub-contracts. The case shows that the respondent negotiated and entered into all his sub-contracts at 2 Penshurst Close, Eastbourne. The main contractor, who, as far as we know, was the only one to give the sub-contractor work, was a Mr Page, who lived at Eastbourne. He went to 2 Penshurst Close to negotiate and agree sub-contracts. Another thing is plain is that the respondent could not carry on business without the tools of his trade. The place where he kept those tools was 2 Penshurst Close. Equally it was necessary for him to keep books – rather rudimentary books, but books of his trade – and he kept them at 2 Penshurst Close; such office work as his business entailed was also done at 2 Penshurst Close. The actual sites where he laid bricks were in a radius of about 50 miles from Eastbourne. In my view the only proper inference here is that the base from which the Respondent carried on his business was 2 Penshurst Close. The fact that it also happened to be his home does not disqualify it from becoming his business base. Mr. Heyworth Talbot has argued attractively, as he always does, that we should regard this man as having shifting bases of business; that is to say, every time he went to a new site that site become the base of his business. I am afraid I cannot accept that argument. We do not know how many sites he worked on during the year, but I dare say there were a good many. The various points of the perimeter of the area in which he worked have been referred to by the Master of the Rolls. But the Case does not, for example, say how many sites he worked at during the course of the year at Reigate or Crystal Palace or the other places. There may have been a number of sites at each place. The Case does not show that he went to some of these places for about three weeks at a time. It has been suggested that he chose to come home for his own purposes each night. There is nothing, however, in the Case to suggest that there were any lodgings available within reasonable distance of the sites which he could have taken for the night if he had wished to do so. Since 2 Penshurst Close was his business base and the place where his chief and indeed only customer knew that he was always to be found, it would be very understandable that exclusively for the purposes of his business he would think it right to return to his base at night from any site on which he was working during the day. In my view the travelling between his base and the sites where he laid bricks was an essential part of his trade. The expenditure on thus travelling was, in my view, for the purpose of enabling him to carry on and earn profits in his trade; or, putting it in another way, was really incidental to the trade itself: see Morgan v Tate & Lyle Ltd [1955] A.C. 21. All these cases differ from each other, and this case is quite different from Newsom's case in the respects indicated by the Master of the Rolls. In that case the Court rejected the view that Mr. Newsom's base at which he carried on his profession was anywhere except Lincoln's Inn. It is possible also to regard Newsom's case as depending to some extent upon a view that Mr. Newsom chose to live in Whipsnade and chose not to live, as he might have done, in Lincoln's Inn or perhaps the Temple. I think, however, it is unnecessary to say any more about that authority except that one day some of the questions that were there canvassed may well be reconsidered; e.g., if it is not possible for a man carrying on a trade to "live over the shop" and his home is as close as reasonably possible to his place of business, can it really be said that his reasonable expenses of travelling between the two are not wholly and exclusively incurred for the purpose of his trade? However this may be, I am quite satisfied in the present case that the learned Judge came to the correct conclusion and I would dismiss the appeal.”

13. Stamp LJ in agreeing with Lords Denning and Salmon acknowledged the difficulty inherent in this type of case and observed as follows:

“I find the greatest difficulty in drawing a line or indicating theoretical distinctions between expenses of travelling to and from home in cases such as those of itinerant traders, itinerant professional consultants or itinerant bricklayers, or persons whose business involves travelling, on the one hand, and, on the other, persons such as Mr Newsom in Newsom's case. The facts of such cases are infinitely variable and one must, in my judgment, look at the facts of each case and decide whether the expenses are money wholly and exclusively laid out for expended for the purpose of the trade or the profession. This Respondent carried on business as a sub-contractor. He did the work at the several places at which the contractor engaged him to do it. But I do not accept the submission that the place or places at which a sub-contractor does work which he contracts to do is or are his place or places of business. As a sub-contractor the Respondent here, who had no place which you could call his place of business except his home, entered into engagements to perform sub-contracts, and he did so at his home, where he kept his tools and some things for the purpose of his trade. In the normal case of a sub-contractor his expenditure in travelling from the place where he carried on his business as a sub-contractor to the several places at which he performs the contracts into which he enters would clearly be expenses falling within s.137. I can see no difference where the centre of his activities is in fact his home which is the only place at which as a sub-contractor he is to be found; and if one finds a man carrying on his activities at his home, entering into contracts at his home and performing the contracts away from his home, it appears to me that the centre of his activities is to be regarded as his home and not at the several places at which he does his work. It is true that his particular business was a very small business involving exiguous office equipment and no doubt only a very few tools, but this cannot in my judgment affect the matter. Once one accepts the position that he was, as the Commissioners find, carrying on business of a sub-contracting bricklayer, and accepting the basis of the case that he was carrying on such a business, it can in my judgment make no difference that it was what I might call a little business.”

Our conclusions

14. The question for us is whether the facts of this case support the claim for motor expenses being deductible or whether, as the Respondents argue, the facts can be distinguished from those in Horton’s case so that the expenses are not deductible. An initial question is whether the Appellant must have a business base at all. If the answer to that is in the affirmative then the question is the location of that base. The Review Officer maintained that the Appellant did not belong to the group which Lord Stamp in Horton’s case described as itinerant traders but was a person such as Mr Newsom in Newsom’s case and Mrs Carney submitted that this was correct. Of course, both Mr. Newsom and Mr. Horton had business bases. Mr Horton's base was found to be at his home and not at the various sites where he worked and Mr Newsom’s base was his Chambers at Lincoln’s Inn and not his home in Whipsnade. In Mr Newsom's case the argument was not that he lacked a base but either that he had two bases or that his base shifted from Lincoln’s Inn to Whipsnade in the vacations. We conclude that a sub-contractor such as the Appellant must have a base for his business. The question is where he has his base.

15. In distinguishing the Appellant from Mr Horton, the Review Officer had said that he had not received evidence showing that he had travelled from home to work at different places during the day, that the Appellant may well examine plans and draw up quotes when he returned home but that by then the Appellant’s self employment had finished for the day. Mrs Carney did not deny that the Appellant did these things but submitted that while he may have done some work at home that did not make it his base, that it was necessary to find his base which was not his home and the facts fell within the principles applied in Newsom’s case so that the travel from home to the place of work was to enable the Appellant to live away from the place where the work is carried out. Although she seemed to accept that the Appellant must have a base Mrs Carney did not venture where the base was to be found although she certainly submitted that the travel between the house and the sites was not an essential part of his trade in the same way as Lord Salmon had found to be the case for Mr Horton and this leads us to conclude that she believed his base to be at those sites. We do not agree that this is the case.

16. In Horton’s case, Lord Denning found that the place of Mr Horton’s trade was Eastbourne and his trade radiated from there. Lord Salmon found it particularly relevant where Mr Horton negotiated the sub-contracts, kept his tools and his books. He acknowledged that the tools were few and the books were rudimentary but, such as they were, they were kept at his home in Eastbourne. We have seen that Lord Stamp acknowledged the theoretical difficulties in this type of case but he did not hesitate in Horton’s case in deciding that the centre of his activities was his home. In Newsom’s case his base was at his chambers. Although he kept tools of his profession, the law books, at home these were a duplicate of the books he had available at his base. He did not need to keep a duplicate set.

17. We conclude on that question in the Appellant’s case as follows and based on the facts which we have found. The Appellant did not use his home for meetings with the contractor in the same way as did Mr Horton although he discussed projects on the phone with them from his home. He did not regularly have a team to co-ordinate nor to pick up and take with him to sites. There was some suggestion that he occasionally took trainee electricians with him but no factual evidence was given about this; even if we accepted that this is so, which we cannot in view of the lack of evidence, we can see that he certainly did not co-ordinate a team to the same extent as did Mr Horton. The evidence that the Appellant could only be found by his business contacts at his home was less compelling than in the case of Mr. Horton. However it is difficult to see how he could have coordinated his business activities without having somewhere to receive the electrical drawings which allowed him to make quotes. He chose to receive them at home. It would be unsatisfactory if he had nowhere from which to prepare the quotes and he prepared his quotes at home. We can see it would be unsuitable for him to do this work at the site where he was working on another project. A person might keep in contact by mobile phone rather than by using a land line or being visited in person but there is no reason why he has to do so and a subcontractor has to make contact with contractors by some means and the Appellant chose to do so from his home phone. He was bound to keep his tools somewhere each evening and he kept them at home. There is no suggestion that he could have left them on the site where he was working. There was no evidence what records he kept but it does seem to have been accepted that such as existed were kept in his home. We were influenced by Lord Salmon's comments that a person who carries on the trade of a sub-contractor cannot do so without entering into sub-contracts, and by the comments of Lord Stamp when he rejected the argument that the place or places at which a sub-contractor does work which he contracts to do is or are his place or places of business saying in the case of Mr Horton that he had no place which you could call his place of business except his home and entered into engagements to perform sub-contracts at that home. The Respondents accepted in their Review that the Appellant might well have examined plans and drawn up quotes when he returned home but concluded that his self employment had finished by that time. This cannot be correct. Entering into sub-contracts must be as integral to being an electrical sub-contractor to being a bricklaying sub-contractor and so the Appellant’s work on plans and quotes at home must be a part of his trading activity which did not therefore cease when he arrived home to deal with these. For these reasons we find that the Appellant had the base for his business at home.

18. Having concluded that the base for the Appellant's trade is at his home we find that the provisions of section 34(1)(a) Income Tax (Trading and Other Income) Act 2005 do not prevent him from deducting his costs of travel to and fro between there and the sites on which he worked or visited in connection with making quotes. However we must make an important point in relation to this conclusion. Although we have found that the Appellant’s business base was at his home it is for the Appellant to show what expenses he incurred wholly and exclusively for his trade. We did not find any reliable evidence of what travel was actually undertaken by Mr Mellor between his home base and the sites on which he worked or which he visited in connection with making quotes for proposed work but this was not an issue on which we were asked to express any conclusion. We were concerned about the contradictory statements made concerning the travel claims and the sites on which it was said by the Appellant that he worked. We have already observed that we have been able to find only very few facts in this case. There was some discussion whether, in addition to being asked whether the Appellant’s home was his business base so that he could deduct the costs of travel from that base to the sites on which he worked and to sites he needed to visit in order to give quotes for work he was seeking, we were also being asked to find whether the actual costs he had claimed were deductible. Mrs Carney had originally submitted that we were being asked this second question but agreed at the hearing that we were merely being asked to decide whether the Appellant’s home was also his business base so that, in theory such costs as we have mentioned would be deductible. We have found that he had a base at his home and so to that extent we allow the appeal.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JUDITH POWELL

TRIBUNAL JUDGE
Release Date: 30 December 2010

First-tier Tribunal (Tax)

MR PAUL MELLOR Appellant

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Mellor v Revenue & Customs [2011] UKFTT 29 (TC) (30 December 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC00906.html Cite as: [2011] UKFTT 29 (TC)