Claiming tax relief for travel expenses from home is not as straightforward as some self-employed individuals might think
Many self-employed individuals work from home. It can often be difficult to determine whether travel expenses from home on business are an allowable deduction for tax purposes. Why is that the case?
‘Wholly and exclusively’ rule
The answer mainly lies in the tax legislation. There are no tax rules specifically dealing with travel expenses for self-employed individuals working from home. Instead, travel expenses must jump over a generic hurdle, which applies to many other categories of business expenditure as well. The relevant legislation simply states:
“In calculating the profits of the trade, no deduction is allowed for… expenses not incurred wholly and exclusively for the purposes of the trade”.
The above legislation (in ITTOIA 2005, s 34) applies to unincorporated businesses, but similar provisions apply in respect of companies (CTA 2009, s 54).
Whilst this tax rule is refreshingly brief, in practice its brevity is a problem, because there is no statutory guidance on what ‘wholly and exclusively’ means in this context. This has resulted in many tax cases, some of which relate to travel expenses for self-employed individuals. Notable cases on this subject include Newsom v Robertson (CA 1952, 33 TC 452) and Horton v Young ( Ch 157).
The general principle to emerge from past cases is that not only must home be a place of business, but it must be the only place of business. This principle was underlined in two more recent cases.
Beware other places of business
In White v Revenue & Customs ( UKFTT 214 (TC)), the taxpayer was a self-employed flying instructor and examiner. He gave flying lessons and examined pilots, invariably at two airports (i.e. Shoreham and Bournemouth). He operated the business from home, and travelled by car between his home and the airports. The taxpayer did not have an office or other accommodation at either airport (or elsewhere).
The taxpayer claimed the cost of travel between his home and the airports in his tax return for 2006/07. However, HM Revenue & Customs (HMRC) decided that the taxpayer was not entitled to deduct his travel expenses, stating that they were not wholly and exclusively incurred for the purposes of his business (nb HMRC also raised discovery assessments disallowing travel expenses for other tax years). The taxpayer appealed.
The First-tier Tribunal (FTT) applied the above test in ITTOIA 2005, s 34 (and its predecessor legislation, ICTA 1988, s 74) in considering whether the taxpayer’s travel expenses between his home and the two airports were incurred ‘wholly and exclusively’ for the purposes of his business.
The FTT accepted that (whilst there was no separate office at his house) the taxpayer’s home was a place of business. Unfortunately, the FTT considered that the taxpayer also had places of business at Shoreham and Bournemouth airports, where he worked almost exclusively.
The FTT concluded that the taxpayer’s travel expenses in respect of the journeys between his home and the airports were not incurred wholly and exclusively for the purposes of his profession as a flying instructor and examiner. The tribunal considered that the expenses were as a result of the taxpayer's decision to live a distance away from the airports at Bournemouth and Shoreham, where he carried on his business. The taxpayer was therefore not entitled to deduct the expenses of travelling between his home and the airports. His appeal was dismissed.
How useful is the Horton case?
The taxpayer in White had relied on a case mentioned above, Horton v Young. In that case, the taxpayer, Mr Horton, was a self-employed bricklayer who worked at various building sites within a 55 mile radius of his home. He worked on each site for three weeks or so. There was no office on the sites. Mr Horton operated from home, where his work was contracted for, the books were written up, and tools were stored.
Mr Horton claimed the cost of motor expenses, which were mostly incurred in travelling to and from home to the various sites where he worked. HMRC refused the claim, and the case eventually proceeded to the Court of Appeal. The court held that Mr Horton’s base of operations was his home. His travel expenses from home to and from the various building sites were therefore wholly and exclusively for the purposes of his trade.
In the White case, it was argued that the taxpayer was an ‘itinerant’ worker in the same way as Mr Horton, on the basis that he went from one airport to another, and therefore the journeys from his home to the airports were allowable. Unfortunately, the FTT considered that Mr White’s situation was not the same as that of Mr Horton. Mr Horton’s only place of business was his home. Mr White had a place of business at home, but he also had other places of business, i.e. the airports. Mr White attended the airports “regularly and predictably” to carry out his professional activities.
A double whammy!
The FTT in White considered other cases aside from Horton v Young, including the Upper Tribunal (UT) decision in Samadian v Revenue & Customs  UKUT 13 (TCC), which was also decided against the taxpayer.
In that case, Dr Samadian was employed as a full-time consultant in the NHS, and in addition was self-employed in private practice. He had an office at home, where he did work relevant to his private practice. He also hired consulting rooms at two private hospitals, where he saw his private patients. There was a dispute between Dr Samadian and HMRC about whether certain travel expenses were deductible against his self-employed income, including journeys between his home and the private hospitals.
The FTT concluded that the two private hospitals were Dr Samadian’s place of business, because he attended them regularly and predictably to carry out his professional activities. The FTT held that the travel expenses between Dr Samadian’s home and the private hospitals were not generally deductible. Dr Samadian appealed to the Upper Tribunal (UT).
Unfortunately for Dr Samadian, the UT upheld the FTT’s decision, and dismissed his appeal. The UT held that Dr Samadian’s journeys from home to the private hospitals and back again did not satisfy the ‘wholly and exclusively’ test, on the basis that the journeys were made partly for the purpose of conducting his private practice at the hospitals, and partly for the private or non-business purpose of enabling him to maintain his home at a location away from the place where he carried on his private practice. The UT summarised the position as follows:
“Travel expenses are treated as deductible in relation to itinerant work (such as Dr Samadian’s home visits to patients)…Travel expenses for journeys between home (even where the home is used as place of business) and places of business are treated as non-deductible (other than in very exceptional circumstances …).”
The tribunal in White considered that the taxpayer's position was much closer to that of Dr Samadian than to that of Mr Horton. The FTT found that Mr White, like Dr Samadian, did not have a fixed presence at the places where he carried on his business (i.e. the airports), but he attended them regularly and predictably.
Where are we now?
The FTT decision in White, and the UT decision in Samadian, both indicate that it is not sufficient to have a place of business at home. If there is another place of business elsewhere, the travel expenses between those places of business will not generally satisfy the ‘wholly and exclusively’ test.
The facts and decision in White and Samadian were in contrast to the Horton case, where Mr Horton’s travel expenses between home and the various building sites were allowed because the only place of business was at his home. In Samadian, the FTT considered (and the UT agreed) that the Horton case was authority for a “limited proposition”. In other words, cases where home is the only place of business are likely to uncommon.
Thus, although White and Samadian do not really break new ground, they perhaps indicate that the Horton case is rather more limited in its application than many taxpayers had previously hoped.
It is not known at the time of writing whether Dr Samadian will take his case any further. In the meantime, based on the above cases, it would seem that self-employed taxpayers wishing to claim travel expenses between home and work will need to ensure firstly that their home is a genuine place of business; and secondly, that home is their only place of business. Travel expenses claimed between home and a particular location with any degree of permanence may attract unwanted attention from HMRC.
Mark McLaughlin CTA (Fellow), ATT (Fellow), TEP
The above article was first published by Tax Insider (www.taxinsider.co.uk).