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Replies to Queries - 3 - Unfair advantage point?

16 May 2001
Issue: 3807 / Categories:

Our clients are directors of two companies, A Ltd & B Ltd. A Ltd is long established and through it our clients operate a tennis coaching academy. The husband does the coaching, with help from subcontracted coaches when additional coaching staff are needed to meet demand, and his wife carries out the administrative tasks and looks after the academy pupils' welfare in a quasi-guardian capacity.

Our clients are directors of two companies, A Ltd & B Ltd. A Ltd is long established and through it our clients operate a tennis coaching academy. The husband does the coaching, with help from subcontracted coaches when additional coaching staff are needed to meet demand, and his wife carries out the administrative tasks and looks after the academy pupils' welfare in a quasi-guardian capacity.

In the year in question our clients' records were destroyed by fire and the company accounts therefore had to be reconstructed from incomplete records. The Inspector has used this unfortunate event as justification for opening an in-depth enquiry into A Ltd (B Ltd and the directors are not under enquiry). The claim for travel expenses remains an area of dispute. Historically our clients used tennis courts in one location, lived in that town and have continued to have an office address in that town.

In the period under enquiry the coaching activity had moved from the above location to another location some significant distant away. The new location was used as the courts were of a better standard and more numerous than at the old location. Also an arrangement between B Ltd and the owners of the courts meant that favourable terms were available to A Ltd to rent the courts. Some of the administrative matters remained carried out at the home and separate office addresses as previously. Pupils therefore were no longer schooled and lodged at the old town and this is why our client's wife needed to travel to the new location in addition to our client. Both clients also needed to attend the new location in order to carry out work as agreed between the tennis courts owners and B Ltd.

The Inspector has stated that he considers the entire travel costs of both clients from the old location town to the tennis courts to be disallowable under section 74(a) and (b), Taxes Act 1988 on the basis that this is home to office travel and, as they were required to attend the new location partly because of B Ltd's arrangements, the costs are not wholly and exclusively for the purpose of one business. The Inspector has indicated that he might be prepared to allow some of the costs in A Ltd on a without prejudice basis.

Can readers suggest an approach to resolve this problem and maximise the claim?

(Query T15,806) – Deuce.


The Inspector is incorrect to disallow the expenses of travelling from the old town to the new town under section 74, Taxes Act 1988. Such a disallowance would be appropriate to an unincorporated business where the sole trader or a partner was travelling from his home to the place of business but is not appropriate to a limited company.

It is assumed that the travel expenses have been paid to the directors by way of expense claims. As such the expenses should have been reported each year on forms P11D with the directors then making claims under section 198, Taxes Act 1988 for the element incurred wholly, exclusively and necessarily in the course of the duties of their employment. Such a claim is not allowed for home to office travel under Schedule 12A to the Taxes Act 1988. Therefore if any restriction is appropriate for travel expenses, the correct place for it to apply is to the directors' personal tax. It should not apply to the company because if it is a benefit to the director then prima facie the rewarding of the director is a legitimate business expense in exactly the same way as the provision of private health care for example: it is simply part of his remuneration package. The Revenue's Inspector's Manual at paragraph IM1042 states that:

'Where a company's payment of remuneration is matched by an equivalent amount assessable as remuneration of the director/employee, any disallowance under section 74(1)(a), Taxes Act 1988 would result in a double tax charge. For this reason disallowance under section 74(1)(a) is only appropriate in exceptional cases.'

The Inspector's reference to B Ltd as a reason for disallowing the expenses seems to be easily rebuttable. The new location provides better and more numerous courts which would presumably have been needed for the growth of the business. The main link with B Ltd seems to be that due to B Ltd the courts can be rented at a better price than would otherwise be the case. Paying a good price is surely evidence as to the business intentions behind the move.

The analysis above of course only shifts the disallowance from the company, where the tax cost may be 30 per cent, to the individual, where it may be 40 per cent. It is not, however, as simple as that as, irrespective of the corporation tax treatment, the benefit in kind provisions will still apply.

'Deuce' therefore needs to be able to show that his clients are able to make a section 198 claim in respect of the travel expenses. The starting point is to identify which of the tennis courts, the office and the home are places at which the duties of employment are performed. The next is to consider at which place each of the directors is based.

Given that the company has separate offices, it is thought unlikely that 'Deuce' will be able to argue successfully that the home is anything other than a home base to which office work will occasionally be brought. If this is so, no travel expenses from the home to the office, or from the home to the tennis courts, will be allowable. Facts which may indicate the contrary include offices in the home, all correspondence goes to the home, bookings are taken at home.

The office and the tennis court will almost certainly be permanent workplaces. Travel between the office and the tennis courts will therefore be an allowable expense as the duties of employment will have commenced on reaching the first workplace. – Wentworth.


I suppose I should have become used to individuals, including Inspectors of Taxes, confusing Schedule E and Schedule D rules but I have not.

What does the Inspector mean by 'prepared to allow some costs on a without prejudice basis'? The costs within the company are allowable business costs. The company is paying travelling expenses for or to its employees. Those costs are allowable unless they have no business purpose at all. Since the employees are travelling for the employer and are receiving the amounts as employees rather than shareholders, the amount is a company business expense.

The individuals will be allowed (or not allowed) the costs of travel under section 198, Taxes Act 1988. After all, they are employees or office holders taxed under Schedule E. Therefore we need to establish where the normal place of work is and whether the tennis court is a normal place of work. Unless there is an intention to use the courts in the other town for less than 24 months, it seems that the new courts have become the permanent place of work for the wife. We are not told what the husband does in respect of A Ltd, or B Ltd, and so I cannot comment on whether the travel costs for him are allowable or not.

I have only one further comment. The Inspector is arguing that the costs are not to be allowed under section 74, Taxes Act 1988. It might be worth accepting the Inspector's incorrect and non-statutory approach to a disallowance in the company under that section rather than a disallowance for the directors who may be taxed at a higher rate than the company if, and only if, the Inspector agrees that there will be no liability on the shareholders under Schedule E or section 418, Taxes Act 1988. – J.W.G.

Extract from reply by 'Muskett':

It is confirmed that some of the administrative duties are carried out from home and separate office addresses as previously, but this matter should be looked at carefully. For example, what address is on the headed notepaper of the business? If this is in the old town (as long as it is not purely an agency for collecting mail) then there is an indication that the business base has not moved. Another point to consider is whether the company employs any administrative staff. If so, where are they based?

The directors should go through all the duties carried out on behalf of the company methodically. If it can be established that, other than the actual coaching duties and the boarding of pupils, the business is run from the old location, it should be possible to establish that the business is still carried on from the old location and travelling expenses provided by the company are allowable for tax purposes in accordance with section 198, Taxes Act 1988.

Issue: 3807 / Categories:
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