The wholly and exclusively rule and the concept of duality of purpose has dogged tax advisers and their clients for generations. Businessmen find it completely incomprehensible (they have another word for it) that expenditure which is obviously incurred entirely for business purposes – like the cost of travelling to work – is not deductible from their profits for tax purposes. We, of course, know better. We know that such expenditure is not for business purposes because it ‘is not to enable a man to do his work but to live away from it’ (Newsom v Robertson (1952) 33 TC 452).
Money spent on work clothing is another example. The current formulation of the rule in ITTOIA 2005 s 34 is that the expenditure must be incurred ‘wholly and exclusively for the purposes of the trade’. The House of Lords ruled in Mallalieu v Drummond [1983] 57 TC 330 that where a taxpayer purchases clothing which is required for doing her job, it was not enough for the expenditure to be wholly and exclusively for the purposes of her trade (or profession). One may wonder why not, if she satisfied precisely the requirements of the section. This is because it was also necessary to consider her subconscious purpose – which, in the case of Mallalieu, was not only to ensure that she was properly dressed for appearing in court (and without which she would not have been heard) but also to satisfy the requirements of warmth and decency. On these grounds, she was not entitled to any deduction for the expenditure.
We know that this is right because the House of Lords said so – and that is the law – but it makes a deduction for any business expenditure very difficult. Just as tax advisers can often find a business purpose for almost any item of expenditure if they try hard enough, so can HMRC find a subconscious non-business motive if it puts its mind to it.
With this background, it is interesting to read the FTT’s decision in G Daniels [2018] UKFTT 462 (reported in Tax Journal, 14 September 2018). Miss Daniels was a self-employed dancer at Stringfellows. She made a claim to deduct the cost of her work clothes. Seeing as how she danced without any clothes on at all (although the judgment does indicate that she kept her shoes on), she obviously had no subconscious purpose of warmth and decency. It is not at all clear what part of her work she needed the clothes for, if it was not to wear when she was dancing, even though the tribunal judge referred to the clothes as being ‘alluring’.
There are extracts from both judgments which are (surprisingly) interchangeable and one might have thought that Daniels had little chance with this argument in the face of such powerful authority. However, the tribunal felt able to distinguish Mallalieu v Drummond and allowed Daniels a deduction for the cost of her clothing.
This gives rise to the odd comparison with Mallalieu, who would not have been permitted to do her job in court if she did not have the right clothes, while Daniels would not have been allowed to do her job on the dance floor if she was wearing any clothes. (To anybody unversed in tax matters, these decisions might seem to be the wrong way round.)
Mallalieu v Drummond was decided in 1983 and an interesting feature of the decision of the special commissioners is that it started with the following sentence: ‘Miss Mallalieu is an attractive blond barrister.’ While that was undoubtedly true, there would be very serious consequences if a judge made such a statement now. The world has moved on – and so perhaps should the reasoning in Mallalieu v Drummond. Maybe the decision in Daniels is a first step in that direction.
The wholly and exclusively rule and the concept of duality of purpose has dogged tax advisers and their clients for generations. Businessmen find it completely incomprehensible (they have another word for it) that expenditure which is obviously incurred entirely for business purposes – like the cost of travelling to work – is not deductible from their profits for tax purposes. We, of course, know better. We know that such expenditure is not for business purposes because it ‘is not to enable a man to do his work but to live away from it’ (Newsom v Robertson (1952) 33 TC 452).
Money spent on work clothing is another example. The current formulation of the rule in ITTOIA 2005 s 34 is that the expenditure must be incurred ‘wholly and exclusively for the purposes of the trade’. The House of Lords ruled in Mallalieu v Drummond [1983] 57 TC 330 that where a taxpayer purchases clothing which is required for doing her job, it was not enough for the expenditure to be wholly and exclusively for the purposes of her trade (or profession). One may wonder why not, if she satisfied precisely the requirements of the section. This is because it was also necessary to consider her subconscious purpose – which, in the case of Mallalieu, was not only to ensure that she was properly dressed for appearing in court (and without which she would not have been heard) but also to satisfy the requirements of warmth and decency. On these grounds, she was not entitled to any deduction for the expenditure.
We know that this is right because the House of Lords said so – and that is the law – but it makes a deduction for any business expenditure very difficult. Just as tax advisers can often find a business purpose for almost any item of expenditure if they try hard enough, so can HMRC find a subconscious non-business motive if it puts its mind to it.
With this background, it is interesting to read the FTT’s decision in G Daniels [2018] UKFTT 462 (reported in Tax Journal, 14 September 2018). Miss Daniels was a self-employed dancer at Stringfellows. She made a claim to deduct the cost of her work clothes. Seeing as how she danced without any clothes on at all (although the judgment does indicate that she kept her shoes on), she obviously had no subconscious purpose of warmth and decency. It is not at all clear what part of her work she needed the clothes for, if it was not to wear when she was dancing, even though the tribunal judge referred to the clothes as being ‘alluring’.
There are extracts from both judgments which are (surprisingly) interchangeable and one might have thought that Daniels had little chance with this argument in the face of such powerful authority. However, the tribunal felt able to distinguish Mallalieu v Drummond and allowed Daniels a deduction for the cost of her clothing.
This gives rise to the odd comparison with Mallalieu, who would not have been permitted to do her job in court if she did not have the right clothes, while Daniels would not have been allowed to do her job on the dance floor if she was wearing any clothes. (To anybody unversed in tax matters, these decisions might seem to be the wrong way round.)
Mallalieu v Drummond was decided in 1983 and an interesting feature of the decision of the special commissioners is that it started with the following sentence: ‘Miss Mallalieu is an attractive blond barrister.’ While that was undoubtedly true, there would be very serious consequences if a judge made such a statement now. The world has moved on – and so perhaps should the reasoning in Mallalieu v Drummond. Maybe the decision in Daniels is a first step in that direction.
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