Perrin v Revenue & Customs [2008] UKSPC SPC00671 (04 March 2008) 

Spc00671

Emoluments from office or employment – Deduction from emoluments – Expenses wholly exclusively and necessarily incurred in the performance of the duties of the employment – Trainee accountant obliged to attend and to pay for training courses leading to ACCA qualification – Whether expense deductible – Whether nature of the employment required the expenditure – Section 336 ITEPA 2003

THE SPECIAL COMMISSIONERS

D W PERRIN	Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Special Commissioner: CHARLES HELLIER

Sitting in public in Cardiff on 12 December 2007

John Brooks, counsel, for the Appellant 

Colin Williams and David Lewis for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Mr Perrin is a Chartered Certified Accountant.  Before he qualified he was employed by a firm of Chartered Accountants.  The terms of his contract with the firm obliged Mr Perrin to incur payments in respect of course fees and reference materials to enable him to qualify.  He made those payments and argues that they were incurred wholly exclusively and necessarily in the performance of the duties of his employment with the firm and accordingly that they are deductible in determining his taxable income.

2.	In pursuit of this contention Mr Perrin made, in his self-assessment returns for 2004/05 and 2005/06, deductions of £2,491.69 and £2,590.50.  The Respondents took the view that these expenses were not deductible and made amendments to those returns by closure notices dated 7 November 2006 and 26 March 2007 disallowing the deductions.

3.	Mr Perrin appeals against those amendments.  The issue for me is whether those sums were incurred wholly exclusively and necessarily in the performance of the duties of his employment.

The legislation

4.	The provision determining the deductibility of expenses from employment income is now found in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), and section 336(1) ITEPA provides:

“336	Deduction for expenses:  the general rule

(1)	The general rule is that a deduction from earnings is allowed for an amount if – 

(a)	the employee is obliged to incur and pay it as holder of the employment, and
(b)	the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.”

The Respondents accept that the issue for determination is that in section 336(1)(b) only.

5.	Prior to 2003 the rule for deductions from employment income was in section 198(10) Taxes Act 1988 which itself re-enacted section 18(1) Income and Corporation Taxes Act 1970, both of which sections provided that:-

“If the holder of an office or employment is necessarily obliged to incur and defray out of the emoluments of that office or employment the expenses of travelling in the performance of the duties of that employment …, or otherwise to expend money wholly exclusively and necessarily in the performance of those duties, these may be deducted from the emoluments to be assessed the expenses so necessarily incurred and defrayed.”  [my emphasis]

6.	The vast majority of the cases dealing with the issue of the deductibility of expenses by an employee were decided on these latter words or their predecessors.  But there was no suggestion before me, nor does it seem possible, that the principles to be derived from those cases which relate to the italiced words do not apply to those words in section 336(1)(b) ITEPA.

The Evidence and the facts

7.	I heard oral evidence from Mr Perrin and from Mahmood Poptam, one of the partners in the firm and the partner responsible for the employment of Mr Perrin; both of them provided witness statements.  I also had before me a bundle of copy documents including the terms of Mr Perrin’s engagement and the staff Handbook.  There was also a statement of Agreed Facts.  I find the following facts:

(1)	The firm was established on 1 April 2004.  One of the partners had previously employed the Appellant from 16 February 2004.  The Appellant became employed by the firm as a trainee accountant on 1 April 2004.  (The relevant expenses were paid after 1 April 2004 and there was no suggestion that the terms of Mr Perrin’s employment before that date were relevant to the argument before me.  I find that the expenses were incurred pursuant to his employment with the firm rather than his previous 6 weeks’ employment with one of its partners.)

(2)	Terms and conditions of the Appellant’s employment with the firm were contained in the Firm’s staff handbook and supplementary terms in a letter dated 6 April 2004.

(3)	In both 2004/05 and 2005/06 Mr Perrin attended various courses to prepare him for the examinations of the Chartered Association of Certified Accountants (the ACCA).  The courses were generally for blocks of 2 to 4 days every month or so.  About half the courses took place during weekdays only and about half were two day courses over a Friday and Saturday.

(4)	Mr Perrin also attended small workshops run at weekends by the ACCA.

(5)	Mr Perrin took and passed the examinations.  He had to pay an examination fee to do so.

(6)	The cost of the courses mentioned in (3) was £2,491.69 for 2004/05 and £2,590.50 for 2005/06.  These costs were paid by Mr Perrin.

(7)	Mr Perrin also incurred expenses in relation to (4) and the examination fees in (5).  No deduction was sought in relation to those expenses.

(8)	When Mr Perrin attended the courses on weekdays he received his salary in respect of the days of attendance  He was not paid for attendance on Saturdays or Sundays.  If he had worked at the office over a weekend he would have been paid overtime.

(9)	The ACCA qualification is obtained by passing exams and by accumulating sufficient appropriate work experience.  It would be difficult to pass the exams without attending the courses.

(10)	Paragraph 7.7 of the staff handbook provided (with the last paragraph below in bold type):-

“7.7	Study Leave

In the absolute discretion of the appropriate partner you may be granted paid study leave to attend external courses, sit examinations and for preparation for such examinations.

Any study leave to enable you to attend an external course at an educational establishment or college shall be granted solely on the basis that it is for your attendance at that particular course of the educational establishment or college only and not for any other purpose.

If, for any reason (e.g. half term, closure during vacations etc), it is not possible for you to attend the external course you are expected to attend the office as usual.

Failure to attend an external course at an educational establishment or college for which study leave has been granted will justify summary dismissal of the individual concerned.”

(11)	The final paragraph had as its aim the prevention of the abuse of study leave by an employee.

(12)	The letter of 6 April 2004 which supplemented the terms of the staff handbook contained the following provisions:-

“Training

We shall provide you with such training that is reasonably necessary for you to qualify for admission for member[ship of the ACCA]…

Expenses

As terms of your conditions of employment you are liable to pay personally the following fees, charges and items of expenditure:

-	[examination fees]

-	the fee you incur in attending either Financial Training 	or  BPP who will provide the necessary tuition for the 	examination. We wish to expressly state that you must 	attend either training provider for a taught and revision 	course in preparation for your examinations …

	…  please note that your employment will be terminated 	if:

-	if you cease studying for the examinations;
-	if you fail any of the examinations on more than three occasions.”

(13)	Mr Poptam regarded the attendance at training courses as part of the duties of staff (like Mr Perrin) employed on training contracts.  In his view the attendance at the training courses was in the performance of the duties of his employment.

(14)	The attendance by its trainee accountants at training courses benefited the firm.

(15)	Mr Perrin wished to obtain the ACCA qualifications.  Obtaining it was one of his purposes in working for the Appellant and attending the courses.

The Parties’ Arguments

8.	Mr Brooks accepts the distinction drawn in Snowdon v Charnock [2001] STC (SCD) 152 between expenditure incurred in the performance of duties (which is deductible) and expenditure to put the taxpayer in a position better to perform the duties (which is not).

9.	He says that, whilst it is clear from Lord Jauncey’s speech in Fitzpatrick v Inland Revenue Commissioners 66 TC 407 that the views of management and employees cannot be determinative of the matter and a statement by an employer cannot therefore be decisive, the views of the Appellant and his employer are highly persuasive.

10.	Mr Brooks distinguishes Fitzpatrick on its facts.  In that case journalists sought deductions for the costs of buying newspapers; the House of Lords held that no deduction was permitted: he says that the journalists in that case were not remunerated for the time spent reading the newspapers at home and were not guilty of a breach of contract if they did not read any of the newspapers at home.  Here Mr Perrin was obliged to attend a course, and his employment would be terminated if he ceased to study for the examinations. These factors pointed towards attendance being part of the duties of the employment.

11.	In Brown v Bullock 40 TC 1 the Court of Appeal held that a bank manager who was obliged to join a club by his employer could not deduct the cost of membership.  Donovan LJ said that even if he had not been expected to join the club “he could still perform his duties as bank manager”.  Here Mr Brooks says that Mr Perrin could not have carried out his duties as a trainee accountant without attending the training courses.  He distinguishes the duties of an accountant from those of a trainee accountant : the latter require the attendance at courses; the former do not.  The very title ‘trainee accountant’ suggest that training, and therefore attendance on the courses, was part of Mr Perrin’s duties.

12.	Mr Brooks distinguishes the facts in Blackwell v Mills 26 TC 468.  In that case the taxpayer was employed as a student assistant at the research laboratories of General Electric and it was a condition of his employment that he should attend classes in preparation for the University of London BSc.  He attended evening classes and was allowed to leave early for these classes and was also allowed paid time off for daytime classes.  His expenses of the courses were found not to be deductible.  Macnaughton J said:-

“It was a condition of Mr Mills’ employment that he should attend evening classes.  [The taxpayer’s counsel] contended that since the subject matter of the evening classes was not unconnected with the duties Mr Mills had to perform, he should be regarded as performing the duties of his office while he was attending the Chelsea Polytechnic. In my opinion any such view is inadmissible.  The duties of his employment were as a student assistant in the research laboratories of the General Electric company. It seems to me impossible to say that, when he was listening to the lecturer at Chelsea Polytechnic, he was performing the duties of a student assistant at the laboratories of the company.”

In Mr Perrin’s case his attendance at the courses was not merely “not unconnected” with his work but part of those duties and important for them.

13.	Mr Brooks notes that in Snowdon v Charnock, where a specialist registrar trainee’s costs of psychotherapy sessions were found to be for the purpose of obtaining an additional qualification and not to be deductible, there appears to have been no argument made on behalf of the Appellant that those sessions were truly part of the taxpayer’s duties of employment, and that by contrast with that case - where the taxpayer sought additional qualification to do the job better, Mr Perrin had to do the training as part of his duties not just to do them better.  He notes that in Snowdon the Special Commissioner said that it was a borderline case.

14.	Mr Brooks distinguishes Lupton v Potts 45 TC 463 where a solicitor’s clerk’s examination fees were found not to be deductible.  There it was found that the duties could perfectly well be performed without paying for the examinations and that the payment by the taxpayer was not to benefit or fulfil an obligation to the employer but to benefit himself because he wanted to become a solicitor.  Mr Perrin’s fees by contrast were for courses attendance on which did benefit his employer and did fulfil an obligation to the employer.

15.	Mr Williams questions whether any weight should be attached to the Appellant’s or his employer’s view of these issues; he sees no magic in the description ‘trainee’ accountant (Mr Mills was a “student assistant” and the psychiatrists were in training posts in both Snowdon and HMRC v Decadt 2007 EHWC 1659 Ch, but that availed them little); he says that Fitzpatrick, Blackwell v Mills and Snowdon make clear that a requirement in a contract to do something does not make it a duty of the employment and that that is so even if failure to do so would result in dismissal (for which proposition he takes me to Consultant Psychiatrist v HMRC (SpC 557)).  He said that the crucial question in Lupton v Potts related to the purpose of the expenditure, and that the private purpose of wanting to become a solicitor which prevented the expenditure from being wholly exclusively and necessarily incurred in the performance of the articled clerk’s duties is mirrored in Mr Perrin’s case.  He said that just as in Blackwell v Mills the student assistant was not performing the duties of his employment when attending lectures, neither was Mr Perrin so doing when he attended courses.

16.	Mr Williams takes me to Decadt where the judge approved the distinction drawn by Dr Brice in Snowdon between “time spent undergoing clearly relevant and perhaps as one view necessary training, from time spent in actually carrying on the duties of the office or employment in question.”

Discussion

In the performance of his duties

17.	It is a necessary condition for deductibility that the expenses are incurred in the performance of his duties.

18.	In Fitzpatrick and Others v Commissioners of Inland Revenue 66 TC 407 at 526 Lord Templeman indicated that the question was one “of law, namely whether upon the facts and the true construction of the … Act … the journalist incurred the expense “in the performance” of his duties”.  Lord Keith agreed.  Lord Jauncey said that he was satisfied that the question was “not only a question of fact upon which evidence might be conclusive but involves a mixed question of fact and law”.  Lord Mustill (p.536) also concluded that the issue was one of mixed fact and law.

19.	In other words this is not a question of simple factual deduction from the primary facts.

20.	In Simpson v Tate  [1925] 2 KB 214, Rowlatt J held that a medical officer of health’s expenses in keeping himself up to date were not deductible.  He found that these were not:

“moneys expended in the performance of his official duties.  He did not incur these expenses in conducting professional inquiries or get the journals to read them to patients …  He incurs the expenses in qualifying himself for continuing to hold the office …”

21.	In Humbles v Brooks 40 TC 500 Ungoed J Thomas held that a headmaster’s costs of attending lectures on history were not deductible:

“In the performance of the said duties means in the course of their performance … in doing the work of the office … It does not include qualifying initially to perform the duties of the office or even keeping qualified to perform them …  It does not mean adding to [his] usefulness in performing his duties.”

22.	Nolan LJ in the Court of Appeal in Fitzpatrick put the test this way in relation to the journalist’s expenses:

“the question the Commissioners had to ask themselves was whether the reading of [the newspapers] should be regarded as a means of maintaining the general qualifications and fitness of the taxpayers to carry out the employments they held, or whether it formed part of the daily duties of those employments.”

23.	In Snowdon v Charnock [2001] STC (SCD) 152, Dr Brice summarised the authorities thus:

“All the authorities distinguish between expenditure incurred in the performance of duties (which is deductible) from expenditure incurred to put the taxpayer in a position to perform the duties (which is not).”

In HMRC v Decadt [2007] EWHC 1659 (Ch) Patten J found that distinction an important and decisive one for the purposes of that appeal.  He found that the expenses involved in undergoing training to qualify the taxpayer to carry out his duties were not deductible.

24.	And in Consultant Psychiatrist v HMRC SpC 557, Dr Avery Jones said:

“The principle to be derived from the authorities is that there is a distinction between the nature of the job requiring the incurring of the expenditure, and the expenditure enabling the person to do the job better …”

Dr Avery Jones however approved an example given in one of the Revenue manuals which indicated a situation in which training expenditure was deductible.  It concerned a scientist employed to undertake research who, as part of that research, attended a presentation given by another scientist which directly affected her own research and incurred costs in that attendance.  There, because the duties of the employment included research, the attendance at the presentation was one of the duties of the employment.  Mr Williams fastened on to the duties including research, and Mr Brooks on to the attendance at the presentation being an integral part of the duties.  But the essence is the same:  the attendance at the seminar was part of the nature of her job rather than preparation for it.

25.	These cases to my mind expose a prior question:  you have to decide what is  the nature of the job before you can decide whether what is done is in the course of the job, or is merely enabling or improving. A surgeon reads the latest research in his lunch break, looks at the scans and x-rays, consults his notes, washes his hands, puts on his gloves and picks up his knife.  Which of those acts are part of the nature of his job and which enable him to do it better or puts him in a position to perform the duties of his job?  It depends on how, semantically, you describe the nature of his job.

In the House of Lords, Lord Browne-Wilkinson, although he was the dissenting voice noted that there had been no dispute about the following propositions of law:

“First, it has to be shown that the expense has been incurred in order to discharge a duty of the employment.  Whether or not a particular operation is a duty of the employment has to be determined objectively by answering the question “Does the nature of the job require the doing of the act which gives rise to the expenditure?”

26.	In Fitzpatrick Nolan LJ in the Court of Appeal said that he thought that the question as to the nature of the employment was to be answered by reference not simply to the legal obligations of the employee, “but by considering once again what the employee has to do as a practical matter in performing the work of his employment” (see Fitzpatrick at p.515). That approach he felt justified the Commissioners’ findings in that case. But given that four of their Lordships in the House of Lords held that the question was one of law and fact, this approach may not be the correct one.  

27.	At the end of his speech (at page 527) in Fitzpatrick Lord Templeman criticises the opinion of Lord Browne Wilkinson that the question was essentially one of fact.  He suggests that Lord Browne-Wilkinson says that the case should be remitted to the Commissioners to decide whether the reading of the periodicals by the journalists was “objectively part of the core duties of their employment.”  He regards the notion of “core duties” as non-statutory and incomprehensible.  I can, however, detect in Lord Browne-Wilkinson’s published speech no such reference to “core duties”, but whatever else it seems clear to me that I must not approach the question of the nature of Mr Perrin’s employment by reference to its core duties.

28.	Thus I must steer clear of determining the nature of the job by reference merely to practical matters and by reference to core duties.

29.	In Fitzpatrick at p.526 Lord Templeman said:

“The journalists in the present case chose to spend several hours a day reading a formidable mass of newsprint dealing with the events of yesterday.  In my opinion, they were not, in the course of that reading, engaged in the performance of the duties for which they were paid.”

I note the last few words “for which they were paid”. Lord Templeman then also notes that a fact common to all the journalists was that “the journalist was not remunerated for the time he spent in reading newspapers at home.”  It seems to me therefore that a valuable insight into the nature of the job may be obtained by asking:  what activities are paid for?  And there may be a difference between the activities which are paid for, and those which are required as a condition of the employment (the student assistant in the laboratories in Blackwell v Mills, the bank manager in Brown v Bullock were all required to do something, but in each case that was not something ‘paid for’ or in the course of his duties).

30.	In Snowdon v Charnock Dr Brice found the following factors as being particularly relevant to the decision that the attendance at the physiotherapy sessions was not in the duties of the training post job: that the cost was not normally met by the employer; that the timing was not dictated by the employer but a matter between the individual and the analyst; and that the timing of the sessions was not acceptable as a reason for being unable to fulfil course requirements.  It seems to me that the last two of these factors are valuable indicators of what the psychiatrist was “paid for”. 

31.	If an employer recruits a number of new employees and says to them “You will start work in the summer, but on the following 1 October and 1 February you must all attend a week’s course at our training centre”, then it seems to me that this attendance is part of the nature of the job and in the performance of their duties: they are paid to attend, they attend at a place and at times specified by the employer, and do what their employer wants them to do there. The same would be true in my view if the course were run by a third party. And, in such a case, if the employee were obliged to pay for the course, then it could be said that the nature of the duties included attendance at the course, and that the obligation to pay was incurred in the performance of those duties.

32,	But where the employer does not dictate the times of attendance, where the attendance is generally required but is outside normal working hours, where attendance must not conflict with other duties, in those situations one hesitates to say that the employee is ‘paid for’ attendance, and it can be said that the nature of the job does not encompass attendance even though it may be required by the employer.

33.	In Mr Perrin’s case I find that the following factors point away from the attendance at the courses being one of the duties for which he was paid (or something required by the nature of his job):

(i)	some of the courses took place partly on Saturdays and he was not paid for attendance on Saturdays, 
(ii)	the staff handbook indicated that study leave could be granted in the discretion of the firm: it is described as ‘leave’ i.e. in the nature of time away from his duties; and there was no prescription as to what training should be done when.  The requirement to attend training in the letter of 6 April 2004 did not alter the fact that paid leave to attend the courses was discretionary. 

34.	I do not find that Mr Poptam’s view that the attendance at the courses was in the performance of Mr Perrin’s duties, nor the fact that Mr Perrin was obliged to attend them by his contract nor even that he could be dismissed if he did not, sufficient to cause me to think that the attendance was part of the nature of his job.  Mr Perrin was a trainee accountant that it seems to me that he was not paid for attending the courses, but for his work in the Firm’s business.

35,	I conclude that the nature of Mr Perrin’s job did not require the expenditure in the courses even though it enabled him to do the job better (with consequent benefit for himself and the firm), and even though attendance was required by his contract; and therefore that the cost of attendance was not incurred in the performance of the duties of his employment.

36.	Had I found that the expenditure was incurred in the performance of Mr Perrin’s duties I would have had some difficulty in concluding that it was exclusively so incurred.  Mr Perrin would have found it difficult to obtain his qualification without the courses and at least to some extent it must have been that the expenditure was incurred for the purpose of getting that qualification and thus not exclusively incurred in the performance of his duties.

37.	I therefore dismiss the appeal.

CHARLES HELLIER
SPECIAL COMMISSIONER

RELEASED: 4 March 2008

SC 3124/2007