The First-tier Tribunal (FTT) recently ruled on a case involving disputed business expenses. Its decision not only addressed the extent to which the expenses were tax deductible but also HMRC’s right to charge a penalty. What’s the full story?

The dispute

Mr Taylor (T) was a self-employed subcontractor from Scotland who worked for an engineering company on projects approximately 350 miles away in the Swindon area. In his accounts and tax returns T claimed deductions for the cost of staying 165 nights in a hotel in Swindon. He didn’t claim for the cost of his meals while there. HMRC refused T’s claim and amended his self-assessment tax bill. It also imposed a penalty calculated as a percentage of the tax that, in its view, T had underpaid. T appealed against HMRC’s amendment to his tax return and the penalty.

Travel expenses

In arriving at its decision the First-tier Tribunal (FTT) looked at judgments in a few of the leading cases involving travel expenses, especially Horton v Young 1972 and Healy v HMRC 2013 ( yr.15, iss.19, pg.2 , see The next step ). T’s argument that he was entitled to a tax deduction relied heavily on the decisions in these cases.

Horton v Young principles

The trouble with T’s claim was that his main reason for staying in Swindon was to get better rates of pay than he could local to home. This point was considered by the judge in Horton v Young . While the taxpayer won that case, the distance he travelled to work was around 60 miles and the journeys were from his home each day. In contrast, T had temporarily relocated his home to Swindon. Consequently, the hotel costs were private expenses for maintaining a place to live. HMRC was therefore right to refuse a tax deduction for them.

Tip. While not an issue addressed by the FTT, T’s travel expenses from the hotel to the various sites around Swindon were tax deductible.

Tax penalty

HMRC’s powers allow it to charge penalties where a taxpayer makes an error in a tax return which results in insufficient tax being paid. But it can only do so if the error resulted from a taxpayer not taking “reasonable care” in completing their return. In this case HMRC accepted that T did not act dishonestly, i.e. his error was not deliberate (for which a higher level of penalty of up to 70% of the tax underpaid can be charged), but it decided he was careless. It said T should have known he could not claim the hotel costs.

Reasonable care

The FTT disagreed with HMRC and reduced the penalty to zero. The judge said T had acted on an “innocently mistaken understanding” of the rules. Furthermore, he had taken professional advice, kept proper records and acted in good faith throughout HMRC’s enquiry.

Tip. HMRC isn’t entitled to charge a penalty if you owe tax due to an error as long as you took reasonable care in arriving at the figures on your tax return. If there are contentious issues, keep a record of the steps you’ve taken to check the tax position. For example keep a copy of HMRC’s online guidance to show how and why you used the figures you did.

While the FTT agreed with HMRC that a tax deduction wasn’t due for the expenses, it cancelled the penalty. The taxpayer had taken “reasonable care” in deciding that he was entitled to claim the expenses, e.g. taken professional advice. It didn’t matter that he was wrong. He had acted reasonably and that is enough to prevent a penalty.

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