Taxpayer wins tribunal case involving “duality of purpose”

Surprising decision

HMRC is notoriously quick to deny a deduction for any business expenses which serve more than one purpose. The landmark case here involved a barrister who was refused a deduction for the cost of her robes, on the basis that the robes provided warmth and decency, as well as meeting the court dress code.

However, in Rogers v HMRC [2021] TC8342 , the First-tier Tribunal (FTT) took a different view to HMRC. The business (R) is a scrap metal partnership. It was caught in an undercover police operation, and offered goods which were said to be stolen. Criminal charges were brought, and one partner was found guilty of one count.

R was successful at the Court of Appeal. Legal costs, amounting to over £500,000, were claimed as a deduction in the partnership accounts as being “wholly and exclusively” business expenses for the purposes of the trade.

HMRC disallowed this on the grounds of intrinsic duality to the expenditure. HMRC said the expenditure was incurred to keep R out of prison, defend personal reputation and protect trade. As regards reputation, HMRC maintained it was impossible to split personal and professional reputation, and that expenses were incurred defending both.

FTT decision

The FTT disagreed. It held that the primary object of incurring the expenditure was defence of the trade, and that this was the exclusive reason. It cast doubt on the likelihood of a custodial sentence and agreed with the individual that his personal reputation was already damaged.

Given the strict regulatory environment for scrap metal dealing, the FTT accepted that overturning the conviction was essential for R to continue to trade: the business would otherwise have had to close. It held that the object of the expenditure was defence of professional reputation: any salvaging of personal reputation was merely a consequence.

The relevant legislation states that:

• in calculating the profits of a trade, no deduction is allowed for:

• expenses not incurred wholly and exclusively for the purposes of the trade; or
• losses not connected with or arising out of trade

• if an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purpose of the trade.

Intrinsic duality

If an expense has intrinsic duality, it’s impossible to show that one part is wholly and exclusively for the trade, and another isn’t. It also follows that no deduction would be allowed. HMRC is likely to assume that ordinary clothing, sustenance, living accommodation, medical costs and (key to R’s case) legal costs to avoid a conviction and protect reputation, fall into the category of intrinsic duality.