UK: Weekly Tax Update - Monday 5 August 2013

Last Updated: 8 August 2013
Article by Smith & Williamson


1.1 Equitable Life compensation

We are seeing payments coming through for those policy holders who had pensions and annuities with Equitable Life who are receiving compensation for poor performance. The loss is calculated and then interest added and then the whole payment is subject to an adjustment leaving the client with 22.4% of the total as calculated.

The question arises whether the interest element is taxable. Interest would be taxable under normal principles, but in this case the Taxation of Equitable Life (Payments) Order 2011 clearly states that "An authorised payment shall be disregarded for the purposes of the Income Tax Acts" and this seems to cover the whole amount.

1.2 Capital Gains Tax – evidence of cost of improvements

The First-tier Tribunal has considered the case of Tobias Ridpath (TC02785).

It transpired in 2010 that Mr Ridpath had disposed of two rental properties in 2004/5. His accountant submitted CGT computations showing gains calculated by deducting the original costs of acquisition and selling costs from the proceeds. HMRC originally intended to deal with the tax position by means of a contract settlement, but Mr Ridpath failed to make an offer in settlement because the computations did not take account of the costs of improvements. No details were forthcoming and HMRC issued assessments. Mr Ridpath appealed on the basis that £40,000 had been spent on improvements, but no evidence was produced.

Mr Ridpath gave evidence to the Tribunal which is summarised in the decision as follows:

The Appellant could not provide any precise evidence about the expenditure incurred. He explained that the initial letter from his previous accountant Mr Roberts suggesting a figure of £40,000 was too low and may have related to only one of the properties - Coldharbour Lane – and indeed the accountant only referred to one property in the initial correspondence. He explained this by saying that his focus at the time had been on Coldharbour Lane because he never imagined he had made any money at all on London Road. The Appellant had a bank account in his name described as Blue Square Trading. The properties were sold in mid-2004 (Coldharbour Lane) and January 2005 (London Road). We saw bank statements for this account. The opening balance in January 2004 was £121,174.67 and £80,633.98 was paid in during June 2004 (total £201,808.65). There were numerous cheques drawn on the account during 2004 and just a few direct debits in favour of utility companies. The balance in December 2004 was £72,988.88 showing withdrawals made in the year of just over £128,000 the bulk of which was incurred in 2004 and £56000 of which was incurred in or before June of that year when the first sale (Coldharbour Lane) took place. The Appellant told us that these amounts did not relate to personal expenditure and therefore the bulk of what was withdrawn must have been expenditure incurred on the two properties. He blamed his then accountant for failing to claim the expenditure. Unfortunately the Appellant was unable to recall how the amounts were spent even when asked about specific withdrawals during the relevant period. He had been unable to obtain copies of cheques. He had always been self-employed and knew he should keep records. He thought he might have cheque books at home but did not have them with him at the hearing and his accountant had not seen them. The work was done by various contractors and he coordinated the work. He employed an architect for the work done on London Road but not for the Coldharbour Lane changes. He thought the cost of work done on Coldharbour Lane was "about £53,000" and the balance had been spent on London Road thereby creating a loss on its disposal.

The Tribunal dismissed the appeal saying:

"We can see it is very likely the Appellant incurred some expenditure on the properties. The difficulty is that we have no idea how much was spent. We are invited to find that some or all of the bank withdrawals were used in this way. The Appellant was unable to point to a single item and explain by way of illustration how the money leaving his account had been spent. Mr Catterall had given him ample opportunity to provide evidence of expenditure. Indeed we can see that the Appellant was treated very tolerantly by Mr Catterall. We have no idea why the Appellant was so vague about the expenditure. It is impossible for us to conclude, as Mr Dubell invites us to do, that he spent some reasonable figure on these works and then guess how much that is - or accept what seems to us equally to be guess work by the Appellant about the expenditure. It is very unfortunate that the Appellant was unable to provide some details of expenses but that was not the case and we have no alternative but to dismiss the appeal."

A salutary tale which demonstrates the fundamental importance of keeping contemporaneous records of improvements carried out to assets that may one day be liable to CGT.


2.1 Actor's claim for travel expenses tax relief to be reconsidered

The Upper Tribunal has overruled the decision of the First-tier Tribunal to allow the actor Tim Healy income tax relief on all his travel, subsistence and accommodation expenses which he incurred when working away from his home on a nine-month assignment. The Upper Tribunal decided that the First-tier Tribunal had failed to apply the 'wholly and exclusively' test properly, and sent the case back for reconsideration.

We accept Mr Conolly's submission that the FTT failed to apply the "wholly and exclusively" test properly and in doing so made an error of law.

The correct approach to the "wholly and exclusively" test, as demonstrated by the authorities, is to consider it by reference to the dual purpose test. In this case this required the FTT to ascertain whether there was a dual purpose on Mr Healy's part in entering into the tenancy agreement for the flat in London for the duration of the Billy Elliot production. In that context, the FTT needed to consider whether in all the circumstances of the case, the sole purpose for renting the flat was in order to carry on his profession of an actor. In order to determine that issue it needed to consider whether the effect of his taking the flat, namely of providing him with the warmth, shelter and comfort that we all need was merely incidental to that purpose or was a shared purpose. If the former were the case the expenditure would have been deductible, if the latter there was a dual purpose and the expenditure would not be deductible.

It is clear that the FTT did not approach the test on this basis. Its finding, as set out in paragraph 36 of the Decision, focused purely on the issue as to whether in taking on the tenancy he was seeking a home in London. It appears to us that the test applied by the FTT was to ascertain whether Mr Healy had moved his home to London and proceeded on the basis that if he had not, then the expenditure could be regarded as having been made wholly and exclusively for a business purpose.

This approach would explain why, in its decision refusing permission to appeal, the FTT commented that if a duality of purpose test was applied expenditure for hotel accommodation could never be deductible as it inevitably provided shelter and warmth. However, as discussed in paragraph 28 above, the duality of purpose test is the test to be applied to see if the expenditure can be deductible, and the cases show that duality of purpose will not be found where the sole purpose is a business purpose and the accommodation costs which result in the provision of warmth and shelter are purely incidental to that. Applied in that way, that is considering whether the warmth and shelter is merely an incidental aspect rather than a purpose in itself, creates no difficulty in finding that accommodation expenses can have a business purpose.

It is therefore clear that the FTT deliberately did not consider the question as to whether the shelter and warmth that inevitably follows from arranging accommodation was anything more than incidental to the business purpose that Mr Healy had in mind.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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