[2011] UKFTT 526 (TC)
TC01373
Appeal number
TC/2009/14480
Income
tax – Whether expenditure was incurred wholly and exclusively for the purpose
of a trade – Identification of the trade – Appeal allowed in part – Section 34
Income Tax (Trading and Other Income) Act 2005
FIRST-TIER TRIBUNAL
TAX
TIMOTHY
JAMES MOORE Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
JOHN BROOKS (TRIBUNAL JUDGE)
CHRISTOPHER
JENKINS (MEMBER)
Sitting in public at Vintry
House, Wine Street, Bristol BS1 on 5 July 2011
The Appellant in person
Simon Bates of HM Revenue and
Customs, for the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. Mr
Timothy Moore is a musician who, for much of the 1980’s and 1990’s toured and
worked with some established names in the music business. His work took him on
tour throughout Europe, the USA, Australia and Japan and in 1985 he performed
with Nik Kershaw at “Live Aid” in Wembley Stadium. However, from around 2000 there
was a significant reduction in his touring and session work and he sought and
found additional sources of income. By 2006-07 Mr Moore was employed at a
private school in Taunton where his earnings were taxed under PAYE. He also
played (and still does) in a band, “The Man From Funkle” which is a partnership
and his share of the profits were and are taxed accordingly.
2. In
addition Mr Moore worked as a self-employed peripatetic guitar teacher at a
local state school, an activity he described as “Music Tuition” in his 2006-07
self-assessment tax return. This return shows that in 2006-07 although Mr Moore
received £7,924 from this activity he suffered a loss of £6,181 as a result of
having incurred expenditure and claimed capital allowances which together amount
to £14,105.
3. On
22 July 2008 Mr John Laity, HM Inspector of Taxes, wrote to Mr Moore to enquire
into his self-employment income from “Music Tuition”. Mr Moore provided
information to Mr Laity from which it became apparent that 94% of the income
came from teaching and that the remaining 6% was derived from other music
related activities. Mr Moore also provided further details of the expenditure
incurred and explained that he had apportioned this between business and
private costs on the basis of advice given to him by the accountants who had
acted for him in the 1980’s and 1990’s. The amount (and percentage) of the
expenditure claimed as a deduction from his income is as follows:
(1)
Bank charges (80%) - £166
(2)
Motoring costs (80%) - £3,522
(3)
Telephone/communication costs (80%) - £645
(4)
Electricity and gas (50%) - £545
(5)
Rent and other household costs (15%) - £690
(6)
Loan repayments (50%) - £3,692
(7)
Travel - £144
(8)
Subsistence - £357
4. Given
that almost all of the income against which these expenses were claimed was
derived from teaching at a local school the amount of expenditure incurred was
challenged by Mr Laity and, following what Mr Bates, who appeared before us for
HMRC, described as “a robust exchange of correspondence” Mr Laity brought his
enquiry to a conclusion by amending Mr Moore’s 2006-07 self-assessment return
restricting the expenses to 10% of the income in recognition of the fact that
Mr Moore would have incurred some expenditure in relation to the music tuition.
5. This
decision was given effect by the issue of a Closure Notice under s 28A of the
Taxes Management Act 1970 (“TMA”) on 24 April 2009.
6. In
addition to the Closure Notice Mr Laity, who had concluded that it was likely
that Mr Moore’s business expenditure had been overstated in previous years,
issued discovery assessments restricting expenditure to 10% of turnover for
2004-05 and 2005-06 but did not do so for earlier years as both 2002-03 and
2003-04 had been the subject of an enquiry by a different officer.
7. At
the commencement of the hearing (and to the clear and obvious dissatisfaction
of Mr Laity who was present) Mr Bates, quite properly in our view, conceded
that the discovery assessments for 2004-05 and 2005-06 were unsound in the
light of the decision of the Tribunal in Agnew v HMRC [2010] UKFTT 272 (TC). Therefore, insofar as these assessments have not been withdrawn, we allow
those appeals and turn to the appeal against the Closure Notice for 2006-07 and
the issue of whether the business expenditure was overstated in that return.
8. Section
34(1)(a) of the Income Tax (Trading and Other Income) Act 2005 provides that “in
calculating the profits of a trade, no deduction is allowed for expenses not
incurred wholly and exclusively for the purpose of the trade.”
9. Mr
Laity considered Mr Moore’s trade from this activity to be “music tuition” (as
distinct from “Musician”) as stated in the return relying on the assertion by
Mr Moore in his letter of 26 January 2009 that by the end of 2001 the work as a
musician had “dried up”. However, Mr Moore contended that teaching was but one
aspect of his business as a musician and that despite a downturn in his
fortunes it was still necessary for him to incur the expenditure claimed as
part of a continuing, albeit volatile, business. As Mr Moore put it in his
letter of 16 July 2009 to Mr Laity:
“It seems to me that the bottom line of all this is
that I view myself as a musician (something I have been all my life) who is
presently teaching as part of my musical activity and you view me as a teacher
who had been a musician and maybe will again.”
10. Having heard
from Mr Moore, although we understand why Mr Laity amended the self-assessment
return, we accept that during 2006-07, despite the significant fall in his
income, he had not ceased to be a musician and become a teacher. We find some
support for our view from the decision of the Special Commissioner (T H K
Everett) in Delian Enterprises v Ellis (HM Inspector of Taxes) [1999]
STC (SCD) 103. In that case an unemployed man who took up trade as a saw doctor
in 1981 made small profits for 5 or 6 years (until 1986 or 1987), then traded
at a loss (initially on his own and later in partnership with his wife) for
some 11 or 12 years before returning to small profits (in 1998). The Inland
Revenue (as it then was) sought to disallow the relief claimed for the
partnership’s losses from 1990-91 to 1996-97 on the basis that there was trade
was not being carried out on a commercial basis but the Special Commissioner
allowed the appeal, finding on the facts that the partnership had been trading
on a commercial basis.
11. Having found
that Mr Moore continued to trade as a “musician” and not solely as a “music
teacher” during 2006-07 it is necessary to consider whether he has established
that the expenditure, described in paragraph 3, above, was incurred wholly and
exclusively for the purposes of that trade.
12. Taking each of
the items of expenditure in turn:
(1)
Bank charges – Mr Moore explained, and we accept, that these arise from
his “Gold Service” account which provides additional facilities such as AA
breakdown cover, travel insurance, purchase protection and free mobile phone
insurance which are relevant to his business.
(2)
Motoring costs – We were told by Mr Moore that he travelled extensively
to attend functions and events where he could meet contacts in the music
industry and that he did obtain work as a result. Although to someone who was
not a musician attending these events may appear to be leisure or entertainment
activities we accept that it was very much a business activity for Mr Moore.
(3)
Communications – In his letter of 26 January 2009 to Mr Laity, Mr Moore
explains that he is “not a great social phone user”. Although he did not expand
on this during the hearing we accept that this is the case and the 80% of the
costs relate to business expenditure.
(4)
Electricity and gas – Mr Moore said that he has a recording studio at
his home and that this requires a lot of power to run and that is why he
claimed 50% of the total costs as a business expenses.
(5)
Rent and other household costs – this equates to a claim for the “use of
home as office” which he had been advised to include by his former accountants
on the basis that some rent and household expenditure would be attributable to
the costs of the business.
(6)
Loan repayment – This appears to include repayment of capital in
addition to interest of a loan which was taken out to cover a large overdraft
which has arisen on the prospect of an impending tour with the Bee Gees which
was subsequently cancelled.
(7)
Travel and Subsistence – These expenses were incurred in connection with
Mr Moore’s business activities as a musician and included a trip to Latvia to
consider a potential role as a producer of a new girl band; a trip to France
for a meeting with a musician he had previously worked with on a Johnny Hallyday
tour; and a trip to the USA for a meeting in Miami where the Bee Gees had their
studio.
13. With the
exception of the loan repayment we find that the expenditure claimed by Mr
Moore was wholly and exclusively incurred for the purposes of his trade or
business as a musician. We also accept that Mr Moore’s explanation (in his
letter of 26 January 2009 to Mr Laity) regarding the capital allowances
relating to “equipment” and in view of our findings in respect of his motoring
costs the capital allowances claimed should not be restricted and, as such, Mr
Moore’s appeal succeeds in part.
14. Section 50(6)
TMA provides that if, on an appeal, it appears to the Tribunal that an
appellant is overcharged by an assessment the assessment shall be reduced
accordingly. We therefore reduce the assessment to take account of our findings
as follows:
Income (as a musician) £ 7,924
Allowable Expenditure £ 10,413
Loss £ (2,489)
15. 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.
JOHN BROOKS
TRIBUNAL JUDGE
RELEASE DATE: 2 AUGUST 2011
