Lessons from the Healy case
Tim Healy, perhaps best known for his role in the iconic 1980’s TV series, ‘Auf Wiedersehen Pet’ has found a different form of audience as a result of his taxation affairs and the consequences of claiming relief for costs incurred whilst he took part in the stage production of Billy Elliot.
The case principally turned upon the deductibility of the costs of renting a flat in London whilst he was acting in the Billy Elliot production. Whilst Mr Healy enjoyed initial victory at the first tier tribunal, following HMRC’s appeal against this decision and a rehearing of the case, HMRC has won on the second attempt: the tribunal has found that the rent paid is not tax deductible.
Anyone who is self employed meets a hurdle that needs to be crossed before expenditure is deductible for tax purposes. That is, you must be able to show that the expenditure is “wholly and exclusively incurred” for the purposes of your trade or profession. The question that is begged by this is what precisely does this mean?
The matter of deductibility has been considered on many occasions but until now perhaps the most famous case concerned the question of the deductibility of court clothes for a practicing barrister (excluding wig and gown). This case established that to be deductible, expenditure must be solely for business purposes: where the expenditure has a dual purpose, it will not be deductible.
In the rehearing of the Healy case, it was the oral evidence provided by the actor that proved fatal to his claim for relief: he confirmed that in taking on the flat, that he knew that he needed space for people who would want to come to visit. This admission of course was not consistent with the assertion that the expenditure was solely for business purposes and on this point, his claim for relief fell. This is as good an example as any of the importance of one knowing the consequences of one’s own statements, before they are made!
The Healy case carries with it important lessons for actors and many other self employed individuals:
- For expenditure to be deductible it must, in the mind of the individual, be being incurred solely for the purposes of the business.
- There must be a clear causative link between the incurring of the expenditure and the trade or profession being undertaken.
- That expenditure might outside of the context of a business would meet ordinary needs such as food or accommodation is not in itself fatal provided that the purpose of the expenditure is business related and that the personal benefit is incidental.
- Accommodation will frequently have as its purpose or one of its purposes, the provision of warmth and shelter.
- That expenditure is necessary does not of itself mean that the wholly and exclusively test is met: expenditure that is necessary for the business may still have a dual purpose and as such not be deductible.
Whilst there is the strict requirement that expenditure is wholly and exclusively incurred, it is provided that where an expense has more than one purpose and that an identifiable part of the expense is incurred wholly and exclusively for business, that part shall be allowed. It is for the taxpayer to show that there is such a part of the overall cost. The cost of a meal or undertaking a journey will never be divisible, however, in some situations costs of accommodation or say running a car will be accepted as divisible. The tribunal found that on the facts there was not evidence of a divisible proportion of the flat that was wholly and exclusively used.
Mr Healy will without doubt feel hard done by: it would be understandable if he felt that the personal benefit of the use of the flat was merely incidental. It appears clear that had the facts or the presentation of the facts been slightly different, a more positive outcome for Mr Healy may have resulted. When considering deductibility of expenditure the importance of being able to evidence that there is a causative link between the expenditure and the business and that any personal or other benefit is merely incidental cannot be overemphasised and that where for whatever reason costs have been incurred with dual purpose, there is ample evidence to back up the basis upon which any element that is purely business related can be established.
For further information, please contact Nigel May or your local tax advisor.