[2010] UKFTT 610 (TC)

TC00851

Appeal number: TC 2010/01108

Income Tax – employment income- deductible expenses – clothing- travel expenses- appeal allowed in part
Income Tax – penalty under section 59 TMA – was the taxpayer negligent – held yes.

FIRST-TIER TRIBUNAL

TAX 

	EVEREST EZE	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	CHARLES HELLIER (TRIBUNAL JUDGE)						SUSAN LOUSADA			

Sitting in public in Sutton on 25 October 2010

Dr Elisha Mafunga and Lovemore Sisimayi of L Wilson & Co for the Appellant

Pauline Carney for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	On 27 May 1008 HMRC wrote to Mr Eze indicating that they had completed their enquiries into his tax returns for the years ending 5 April 2006 and 2007 (we call these years “2006” and “2007”), and that they had amended those returns by reducing the amount of the deductible expenses he had claimed against his employment income in those years. He had claimed deductions for expenses amounting to some 40% of his net income. The reduction was by just over £6,000 for both years. This had the result that additional tax of some £1,350 was assessed for each year.
2.	On 5 May 2009 HMRC notified Mr Eze of the determination of a penalty under section 95(1)(a) Taxes Management Act 1970 for negligently delivering incorrect returns for each of 2006 and 2007. The penalties totalled £273.
3.	Mr Eze appeals against the amendments and the penalties.
Our Finding of Fact
4.	Our duty is to decide what are the facts from the evidence before us, and to apply the law to those facts. If a taxpayer asserts that something in relation to his affairs is the case and as a result that HMRC are wrong, then, because he is the person who best knows about his own circumstances, he needs to produce the evidence to persuade us on the balance of probabilities that he is correct. Without evidence that something is the case we cannot find that it is so. Evidence need not be documentary, although contemporaneous documents tend to suffer less with the passage of time than personal recollections, and need not be first hand, although it is less easy to test the reliability of second hand evidence. Depending on the nature of the evidence we may attach more or less weight to it.
5.	In this case we heard no evidence from Mr Eze directly. We heard from his accountants about what they recalled Mr Eze had imparted to them and about the documents he had given them. With the exception of some photocopies of weekly bus tickets and some one day travel cards for the calendar years 2003 to 2005 we had no documentation before us which directly evidenced Mr Eze’s expenses. Mr Eze’s accountants had prepared a summary of Mr Eze’s expenses for each if the relevant years, but we were told by Mr Sisimayi that no further documents were available to support this summary because their computer records had become corrupted and Mr Eze had lost the original documents. 
6.	This was very thin evidence on which to try to come to a conclusion about what expenses Mr Eze had incurred. Even if we accepted that Mr Eze’s accountants had properly prepared the summaries from documents given to them by Mr Eze, we had no way of testing whether Mr Eze had actually incurred the costs, whether the description of the costs was accurate, or why and how he had incurred them.
7.	On the evidence given to us we find as follows
(a) Travel Costs
8.	Mr Eze claimed travel costs of £1,305 for 2006, and £1,398 for 2007.
9.	Mr Eze lived in Harrow in the relevant period and was employed as a general site operative by O’Neill & Brennan Construction (“O’Neill”). In that capacity he worked at several construction sites in London.
10.	Mr Eze had told Mr Sisimyi that he would report for work at a site and would then be told at which site he would be working. He would then travel to that site. A letter from O’Neill to HMRC in reply to HMRC’s questions, said that Mr Eze was “only required to travel to and from place of work”. It specified four sites at which he had worked in 2006 and 2007. Mr Eze’s payslips recorded the name of a site. We think it likely that the site recorded is that at which he worked in the relevant week, although Mr Sisimayi suggested that it was the site at which he turned up to get instructions as to where he should go. An analysis of the available payslips prepared by HMRC showed the recorded site as Kennington Road in the only available payslip for 2006, as Imperial Wharf Block H (which was not among those listed by O’Neill in their letter to HMRC) for each of the 25 available payslips for 2007. For 2008 four payslips were available: one recorded the site as West Hampstead, the other three as Imperial Wharf Block H. 
11.	We conclude that Me Eze worked at more than one site in 2007 and 2008, but that in that period he regularly attended Imperial Wharf Block H.  We accept that on occasion he would arrive or be working at one site and be told to go to another.
12.	The copies of the travel tickets for 2003 to 2005 showed only 12 occasions on which a one day travel card had been purchased, and 43 weekly bus passes. Whilst the 7 day bus passes suggest that Mr Eze had the means of travel between two sites without extra expense, the one day travel cards suggest that this was not always possible. When Mr Eze had purchased a weekly bus pass this would cover his travel to work, and if he used it to travel between sites there would be no extra expense incurred in making that journey. We conclude that the only extra expense of any travel between sites was the occasional purchase of one day travel cards, and that it was unlikely that there were more than five occasions in each of 2006 and 2007 when such expense would have been incurred. We find from this evidence that £30 was incurred on such travel in each year. 
(b) Other Expenses
13.	Mr Eze’s accountants sent the following analysis of Mr Eze’s other expenses to HMRC on 4 May 2008. 

Expense	2006
£	2007
£	
Helmet	146	105	
Gloves	138	126	
Boots	704	698	
Socks	66	72	
Work Clothes	1,985	1,874	
Masks(ear/nose)	142	144	
Goggles	114	155	
Mobile calls	798	654	
laundry	875	558	

14.	In reply to a letter from HMRC asking about Mr Eze’s employment, O’Neill replied on 9 October 2007 to the question asking for full details of all equipment that he was required to purchase in order to perform his duties: “All PPE supplied.”, and to the question asking for details of any amounts reimbursed for this equipment, “No reimbursement for PPE”. 
15.	Mr Eze’s accountants report him as saying in response to this that he “does not get any of the industrial work clothes/goggles/boots/allowance for travel between sites/helmets/reimbursement of mobile calls/masks/etc.” and that “O’Neill & Brennan might have an obligation to provide those items to the employees. Therefore they had to say something along those lines to protect themselves….The Employer does not provide any PPE items.”
16.	In an email to Mr Sismayi of 28 January 2008 O’Neill say “the only thing we supply is the PPE (Personal Protective Equipment) like Hard Hat, Hi-Vis Jacket etc. However if we supply the PPE we deduct the money of the operatives wages afterwards.”
17.	Mr Sismayi told us that when he spoke to a lady at O’Neill he was told, off the record, that “some employees don’t know we’re taking the money”.
18.	The only payslip we were shown was for 13 May 2007 which showed a deduction of £196.35 for “SUBS”.
19.	Mr Sismayi told us that Mr Eze used his mobile phone on site to communicate with other workers on the site. 
Our evaluation
20.	(a) PPE: helmets, gloves, boots, goggles, masks, high visibility clothing 
21.	O’Neill’s letter to HMRC is not inconsistent with the proposition that where they supplied PPE they recovered the cost of it from Mr Eze. We conclude that Mr Eze incurred expense on PPE in the relevant years. 
22.	HMRC allowed £150 per annum for that expense. Mr Eze claims some £1300 per annum. We had no evidence from Mr Eze. We could not ask for example how many helmets were bought, why they were bought both in 2006 and 2007, how long they lasted, what they cost. There was no documented evidence of expenditure in other years with which a comparison could be made.  The evidence produced to us was insufficient for us to conclude  that the amounts claimed represented expenditure on these items in the relevant years. 
23.	Furthermore it seemed to us that the expenditure claimed in relation to at least some of these items was excessive. Thus £704 on Boots seemed to us to represent an unusually large number of pairs of boots. 

24.	(b) Other: work clothes, socks, laundry, mobile calls
25.	We accept that some expenditure was incurred under these headings. But there was no evidence as to the activity in which it was incurred: did Mr Eze wear the clothes only at work, were they somehow adapted only for work? Why was the laundering of his clothes necessary for the duties of his employment? How was the cost of mobile calls which took place at work rather than for private purposes determined? What was the precise nature of the work call? Was it necessary for any employee in his position to incur this cost?
26.	We conclude that although expenses were incurred it was not shown that they were incurred exclusively in the work, or that the expense incurred for non work activities was only incidental to the work expense, or that it was necessary for any employee in Mr Eze’s position to have incurred these expenses. 
The relevant Law
27.	The statutory provisions permitting deductions for expenses incurred by an employee against his employment income are notoriously strict. They are now contained in Chapter 2 of Part 5 ITEPA. The relevant provisions are these: 
336 Deductions for expenses: the general rule
(1)     The general rule is that a deduction from earnings is allowed for an amount if—
(a)     the employee is obliged to incur and pay it as holder of the employment, and
(b)     the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
(2)     The following provisions of this Chapter contain additional rules allowing deductions for particular kinds of expenses and rules preventing particular kinds of deductions.
(3)     No deduction is allowed under this section for an amount that is deductible under sections 337 to 342 (travel expenses).	
28.	It will be seen that there is a strict general test for expenses other than travel expenses: the expense must have been incurred:
(1)	in the performance of the duties, 
(2)	wholly in that performance
(3)	exclusively in that performance, and thus not in some other activity. We elaborate on this requirement below; and 
(4)	necessarily in that performance: it has been decided in a series of cases that this condition means that not only must the employee be obliged to incur the expense as part of his employment but it must be necessarily incurred as a result of the nature of the duties of his employment - in other words that any employee in that position would have had to incur that expense.
29.	The requirement that an expense be incurred “exclusively” has been considered by the Courts in relation to the condition for the deduction of the expenses of a trade that the expense be incurred exclusively “for the purpose” of the trade. In relation to that latter test the Courts have held that if an expense was incurred for more than one purpose it could not be regarded as being incurred exclusively for the purposes of the trade. Thus the House of Lords found in Mallalieu v Drummond 57 TC 330 that clothing purchased by a barrister for the purposes of appearing in Court but also for the purpose of securing warmth and decency was not exclusively incurred for the purpose of the taxpayer’s business. 
30.	This rigid rule is relaxed to some extent if one of the purposes for which the expense is incurred is merely incidental to the other. Thus in Cailebotte v Quinn 1975 STC 265 Templeman J said “The cost of protective clothing worn in carrying on a trade will be deductible, because warmth and decency are incidental to the protection necessary to the carrying on of the trade”
31.	In Hillyer v Leeke, 1976 STC 490, quoted to us by Mrs Carney, Goulding J found that the same meaning must be conferred on “exclusively” when used in the employment provisions. The question in that case was whether the costs of suits worn only at work was deductible. Having considered the cases he said:  “…the expenditure in question, although on suits that were worn only at work, had two purposes inextricably intermingled and not severable by any apportionment the court could undertake.” The expense was therefore not deductible. 
32.	Thus if an expense is incurred not only in the performance of the duties of an employment but also in fulfilling some other function such as the provision of warmth and decency in a manner which is not incidental to the duties of the employment, the expense will fail the test because it will not be incurred exclusively in the performance of the duties.
33.	The rules for travel expenses are a little more liberal:

337 Travel in performance of duties
(1)     A deduction from earnings is allowed for travel expenses if—
(a)     the employee is obliged to incur and pay them as holder of the employment, and
(b)     the expenses are necessarily incurred on travelling in the performance of the duties of the employment.
(2)     This section needs to be read with section 359 (disallowance of travel expenses: mileage allowances and reliefs).	

338 Travel for necessary attendance
(1)     A deduction from earnings is allowed for travel expenses if—
(a)     the employee is obliged to incur and pay them as holder of the employment, and
(b)     the expenses are attributable to the employee's necessary attendance at any place in the performance of the duties of the employment.
(2)     Subsection (1) does not apply to the expenses of ordinary commuting or travel between any two places that is for practical purposes substantially ordinary commuting.
(3)     In this section “ordinary commuting” means travel between—
(a)     the employee's home and a permanent workplace, or
(b)     a place that is not a workplace and a permanent workplace.
(4)     Subsection (1) does not apply to the expenses of private travel or travel between any two places that is for practical purposes substantially private travel.
(5)     In subsection (4) “private travel” means travel between—
(a)     the employee's home and a place that is not a workplace, or
(b)     two places neither of which is a workplace.
(6)     This section needs to be read with section 359 (disallowance of travel expenses: mileage allowances and reliefs).

339 Meaning of “workplace” and “permanent workplace”
(1)     In this Part “workplace”, in relation to an employment, means a place at which the employee's attendance is necessary in the performance of the duties of the employment.
(2)     In this Part “permanent workplace”, in relation to an employment, means a place which—
(a)     the employee regularly attends in the performance of the duties of the employment, and
(b)     is not a temporary workplace.
This is subject to subsections (4) and (8).
(3)     In subsection (2) “temporary workplace”, in relation to an employment, means a place which the employee attends in the performance of the duties of the employment—
(a)     for the purpose of performing a task of limited duration, or
(b)     for some other temporary purpose.
This is subject to subsections (4) and (5).
(4)     A place which the employee regularly attends in the performance of the duties of the employment is treated as a permanent workplace and not a temporary workplace if—
(a)     it forms the base from which those duties are performed, or
(b)     the tasks to be carried out in the performance of those duties are allocated there.
(5)     A place is not regarded as a temporary workplace if the employee's attendance is—
(a)     in the course of a period of continuous work at that place—
(i)     lasting more than 24 months, or
(ii)     comprising all or almost all of the period for which the employee is likely to hold the employment, or
(b)     at a time when it is reasonable to assume that it will be in the course of such a period.
(6)     For the purposes of subsection (5), a period is a period of continuous work at a place if over the period the duties of the employment are performed to a significant extent at the place.
(7)     An actual or contemplated modification of the place at which duties are performed is to be disregarded for the purposes of subsections (5) and (6) if it does not, or would not, have any substantial effect on the employee's journey, or expenses of travelling, to and from the place where they are performed.
(8)     An employee is treated as having a permanent workplace consisting of an area if—
(a)     the duties of the employment are defined by reference to an area (whether or not they also require attendance at places outside it),
(b)     in the performance of those duties the employee attends different places within the area,
(c)     none of the places the employee attends in the performance of those duties is a permanent workplace, and
(d)     the area would be a permanent workplace if subsections (2), (3), (5), (6) and (7) referred to the area where they refer to a place.
	
34.	The effect of section 338 is that the expenses of necessary travel which the employee is obliged to incur, once the employee is at work, are deductible. The effect of section 338 is that the expense of travel to a temporary workplace may be deductible, but the expenses of travel to a permanent workplace will not be. 
35.	We note that section 339(3)(a) refers to a task of limited duration, and that the words of subsection (4)(b) indicate that the duties of an employment may be comprised of a number of tasks. 
Conclusions
(a) travel costs
36.	We concluded that Mr Eze had incurred £30 in each year on the expense of travel between sites once he was at work. This expense satisfies the conditions in section 337: he was obliged to incur it as the holder of the employment, and they were expenses incurred in travelling in the performance of the duties of his employment.
37.	The other travel expenses incurred by Mr Eze relate, in our view, to his travel from home to the site at which he was working. Such expense is not deductible under section 337 because, while travelling to work, Mr Eze was not at work and thus not travelling in the performance of his duties. But the expense could be allowable under section 338 to the extent it was not travel to a “permanent workplace”. 
38.	It was clear that Mr Eze regularly attended Imperial Wharf Block H in the performance of the duties of his employment. As a result that site would be a permanent workplace within section 339(2) unless it was a temporary workplace. It seemed likely, from its name, that Imperial Wharf was a building site (although there was no direct evidence as to this). If so the work to be performed there could be “of limited duration”. In that case, given in particular the letter from O’Neill indicating that he worked at several sites, even if his attendance there was not for the purpose of performing a task (or a series of tasks) of limited duration (which seemed unlikely), it could be for a “temporary purpose” and thus Imperial Wharf could be a temporary workplace under section 339(3) unless (4) or (5) applied.
39.	By subsection (4) it would not have been a temporary workplace if he travelled there to have tasks allocated to him. There was some evidence that this might have been the case in that Mr Sisimayi said that Mr Eze had said he would turn up to one place and be allocated to another. But it seemed more likely that it was a building site at which he worked and thus not disqualified as a temporary workplace by subsection (4). 
40.	 But section 339(5) and (6) require a workplace not to be treated as temporary if the employee goes to it for a continuous period of 24 months (or his duties are performed there to a significant extent in that period); whilst it seemed likely that Mr Eze had gone to Imperial Wharf for most of 2007, it was not clear whether he had or had not gone there for a continuous period of 24 months. The letter from O’Neill, which mentioned four places of work, and the fact that the analysis of the payslips showed other sites in 2006 and 2008, suggested that it was possible that over such a period Mr Eze did not go continuously (or substantially continuously) to Imperial Wharf Block H for more than 24 months, but although that was a possible conclusion form the evidence there was insufficient evidence for us to conclude that that was more likely than not   We therefore concluded that it was not shown that that site should be regarded as a temporary workplace. 
41.	As a result we concluded that Mr Eze’s travel to the sites at which he worked in 2006 and 2007 was travel to a permanent workplace and thus ordinary commuting within section 338(3). A deduction for travel to the sites was therefore not permitted by section 338. 
42.	As we have mentioned there was no direct or documentary evidence of Mr Eze’s travel expenditure in 2006 and 2007, but, in contrast to the position in relation to other expenditure, we did have before us copies of some bus and train passes for previous years, namely for the period January 2003 to October 2005. We accept that these copies were copies of tickets provided to L Wilson & Co by Mr Eze and that it is likely that they were for travel he had undertaken. In 2004/05 the cost of the passes exhibited totalled £195.40; in 2003/04 the cost was £198.40. The passes did not cover every week for either year and we believe that the cost of travel for a whole year of work would have been perhaps twice this amount, but no more.
43.	We found this evidence sufficient to conclude on balance that it was likely that Mr Eze’s cost of travel to his workplace in each of 2006 and 2007 was £400. Thus, had we been persuaded that Imperial Wharf was a temporary workplace, we would have concluded that this amount was deductible.
44.	We therefore conclude that Mr Eze incurred in each of 2006 and 2007 £30 of deductible travel expenses: being the £30 under section 337 in respect of travel he was obliged to incur as the holder of his employment, necessarily incurred in the performance of its duties.
(b) other expenses
45.	In our judgement it is likely that any expense incurred by Mr Eze on helmets, gloves, goggles, masks and high visibility clothing was incurred necessarily in the performance of his duties, and, although such items might also be used in providing warmth or in fulfilling other functions, such use would have been incidental to the performance of his duties. Thus the expense would have been incurred wholly exclusively and necessarily in the performance of those duties. 
46.	However, the evidence before us was insufficient for us to be able to conclude that the sums claimed had been incurred on these items, and indeed we thought it possible that these claims were excessive We therefore do not find that the allowance for these items should be increased above that determined by HMRC
47.	The evidence before us in relation to work clothes, socks and laundry was insufficient to convince us that these expenses were incurred wholly exclusively and necessarily in the performance of Mr Eze’s duties. In particular there was no evidence on which we could conclude that such expenditure was not incurred in providing human comforts to Mr Eze, and thus that it was exclusively incurred in those duties. As a result we cannot uphold the appeal in relation to these items. Nor was the evidence sufficient to enable us to conclude that any lesser sum should be treated as deductible.  
Summary
48.	We thus conclude that the total allowable expenses were £180 in each year, £30 more than determined by HMRC.
The Penalty
49.	Section 95 Taxes Management Act 1970 provides that:
“Where a person…negligently
(a)	delivers any incorrect return…
he shall be liable to a penalty [of the difference between the tax actually payable and the tax which would have been payable on the basis of his return].”

50.	By section 100 TMA HMRC are given power to mitigate any penalty. HMRC reduced the penalty by 90%]in this case.
51.	We find that Mr Eze’s return was incorrect. His claim for travel expenses exceeded that which was deductible. We think it likely that the elements of his claim in relation to expenditure on work clothes and laundry were not deductible, and that his claim for PPE was overstated.
52.	Was the delivery of the return in that form negligent? It was clear that Mr Eze had relied on L Wilson & Co to prepare his return. Was such reliance sufficient to mean that the delivery of the return was not negligent? 
53.	We accept the test of negligence put forward by Mrs Carney: “Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.”
54.	It seems to us that the expenses claimed in Mr Eze’s return were not merely a little wrong but clearly excessive. To claim so much more than is allowable is not something a reasonable man would have done. The return was delivered negligently. In these circumstances it does not seem to us that any reliance placed by Mr Eze on his accountants prevents the delivery of the return from having been negligent.
55.	We find that a penalty was due under section 95. The amount of the penalty charged falls to be reduced as a result of our finding that an additional£30 of expenses are to be allowed  in each year. This will reduce the penalty charges (after the mitigation allowed by HMRC) by a small amount. 
Rights of Appeal
56.	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.

CHARLES HELLIER

TRIBUNAL JUDGE
RELEASE DATE: 30 November 2010