Double trouble – two decisions on duality of purpose

There have been two decisions recently that look at the question of whether expenses have been incurred wholly and exclusively for the purposes of a trade carried on by an individual. The first is the Upper Tribunal decision in the case of Revenue and Customs Commissioners v Healy ([2013] UKUT 0337 (TCC)), which was published on 1 August 2013 and the second is the First-tier Tribunal (FTT) decision of Philip McMahon (TC02799) which was published on 2 August 2013.

As this is can often be a contentious area of tax these cases will be of interest to practitioners and their clients.

RCC v Healy

Mr Healy is an actor, and in the FTT it was decided that he could claim a deduction for costs in connection with accommodation expenses on a flat that he took on a nine month tenancy while he was working in a show in London. The decision was reached on the basis that he had retained his home in Cheshire, and that the only reason he took the tenancy was because he was working in London.

In essence, the FTT took a pragmatic approach to the case. They did not consider Mr Healy had moved home and it was not feasible for him to commute between performances. If he had simply stayed in a hotel for nine months a claim for hotel expenses would not have been challenged so they took the view the costs of renting the apartment, which were cheaper than a hotel, should be deductible. We looked at this decision on 2 May 2012.

HMRC appealed against this decision, contending that the FTT erred in law in failing to consider, or consider properly, whether Mr Healy had a dual purpose in incurring the expenditure in question, namely to meet his ordinary needs for warmth and shelter as well as his stated business purpose.

Unfortunately, Mr Healy was not present for the Upper Tribunal hearing who having considered the facts agreed that the FTT had not considered fully the duality point and that the case should be referred back to the FTT so that they can reconsider the facts including ascertaining from Mr Healy his intentions and reasons for renting the property.

What is the wholly and exclusively test?

The Upper Tribunal agreed with HMRC, and in outlining their decision presented the following summary of the principles in connection with the wholly and exclusively test:

“In our view the following principles can be derived from this analysis of the authorities:

(1) The “exclusively” limb of the “wholly and exclusively test” entails examining whether the expenditure in question has a dual purpose. If the expenditure is not solely for a business purpose it will not be deductible (Bentleys, Stokes & Lowless, Mallalieu v Drummond);

(2) Expenditure on items that outside a business context simply meet ordinary needs can be regarded as having solely a business purpose such as food and drink in the context of business lunches (Bentleys, Stokes & Lowless), hotel accommodation in the context of business trips or conferences (Elwood v Utitz), accommodation for an itinerant trader (Sean Reed);

(3) Consequently, there is a distinction between effects which are aimed at (the purpose of the expenditure) and those which are incidental to that aim; the latter do not necessary colour the former, even if they are inevitable (Elwood v Utitz and the third passage from Mallalieu v Drummond cited in paragraph 50 above);

(4) However, expenditure will not be deductible unless there is a clear connection between the expenditure incurred and the trade or profession in question (Caillebotte v Quinn, MacKinley v Arthur Young, McClelland Moores), and a distinction must be drawn between living expenses and business expenses (Newsom v Robertson);

(5) There are some categories of expenditure which by their nature cannot be said to have been incurred for a business purpose, such as relocation expenses to help setting up a comfortable home (MacKinley v Arthur Young, McClelland Moores) or clothes which are necessary to maintain decency (Mallalieu v Drummond);

(6) In relation to accommodation costs it will often be the case that in that in the nature of things one of the purposes of the taxpayer in incurring the expenditure will be their ordinary needs for warmth and shelter (Mason v Tyson, Prior v Saunders) and this can be the case even if it is a contractual requirement of a trade that the taxpayer reside in a property at all times (McClaren v Mumford);

(7) Although the longer the period of time the accommodation in question is occupied the more likely it is that the private purpose will predominate (Hanlin) we have not identified any principle that rules out the deductibility of rental accommodation except in special circumstances;

(8) The test concerns the subjective purpose of the taxpayer, which is a question of fact and determining whether the test is met will involve looking into the taxpayer’s mind, save in obvious cases which speak for themselves (Mallalieu v Drummond); and

(9) The fact that an item of expenditure may be necessary for an individual to conduct his trade does not mean that it passes the “wholly and exclusively” test (Newsom v Robertson).”

From a commercial perspective, there is clear logic why Mr Healy would rent accommodation rather than living in a hotel for none months but commercial logic does not always sit well with tax law. If Mr Healy’s subjective intention was to rent the flat purely to be able to fulfil his work commitments and the fact that it provided him with warmth and shelter was incidental then it is hoped such costs would be deductible otherwise expenditure on hotels would never be deductible.

Philip McMahon

In the second case heard by the FTT, Philip McMahon concerned an individual who had worked for a large recruitment consultancy which he left to set up his own consultancy. When he left he took with him details of his employer’s clients in breach of his contract of employment. His former employer took action against him as a result of which he agreed to pay his former employer £100,000. He also incurred legal costs of £15,354.70.

Mr McMahon argued that he incurred the expenditure in order to preserve his business, and on this basis the expenditure should be deductible against his profits. However, HMRC contended that the sum paid was at least partly referable to his breach of contract. As such there was duality of purpose and the expense was not incurred wholly and exclusively for the purposes of his trade.

The Tribunal decided that the expense was incurred for two purposes, first to preserve his business, and secondly to defend and settle the proceedings including the claim for damages for breach of contract and breach of fiduciary duty. This means that there is duality of purpose and the expense is not deductible against profits.


These cases highlight the importance of establishing that expenditure has been incurred exclusively for the purposes of a business. The key is to establish that there is a clear connection between the expenditure and the trade being carried on, and that there is no other motive for incurring the expenditure that is not directly relevant to that trade.

If you would like further information in relation to the wholly and exclusively test please contact the TaxDesk on 0845 4900 509 and ask for Paul Howard.