Keith M Gordon examines the provisions in ICTA 1988, section 198, on teachers’ expenses and whether a tax deduction is available.
Published in the July issue of Tax Adviser. For me, one of the favourite things about being a chartered tax adviser (apart from reading Andrew Flint’s monthly articles in Tax Adviser) is coming across a piece of legislation that most practitioners are familiar with and discovering that it has been wrongly interpreted by both accountants and the Inland Revenue for many years.
It is for this reason that I was interested to read Dr John Booth’s recent articles (December 2001 and May 2002) on teachers’ expenses and whether a tax deduction is available under Income and Corporation Taxes Act 1988 (ICTA 1988), s. 198 to them on use of a home.
However, despite my keenness to discover that everyone had been getting it wrong for 150 years and notwithstanding Dr Booth’s lucid arguments, I fear that there is no true entitlement in law for a teacher to obtain a deduction in respect of some of the expenses of maintaining a home.
In this article, I will examine afresh the provisions in s. 198 and why I maintain that teachers will not be entitled to relief. I will then respond to some of the assertions made by Dr Booth, consider the position for university lecturers and see whether there is a way forward.
The stringent test in section 198
As most tax advisers would be able to recite in their sleep (and, no doubt, some do), relief will only be given in respect of expenditure incurred ‘wholly, exclusively and necessarily’. The more precise readers will be able to add the no less important criterion ‘in the performance of the duties of the office or employment’. Following the revisions to the section in both Finance Act 1997 and 1998 (FA 1997 and FA 1998) – the latter superseding the former –, these famous words are found in s. 198(1)(b). Section 198(1)(a) deals with the new breed of qualifying travel expenses which are not considered here.
The apparent source of the teachers’ entitlement to relief
Dr Booth highlights the statutory changes made to teachers’ pay and conditions in the Teachers’ Pay and Conditions Act 1987 and the subsequent secondary legislation. In particular, he cites The Education (School Teachers’ Pay and Conditions Employment (Order) SI 1987/650, Sch. 1, para. 4(3)(a) and Sch. 3, para. 4(1)(f). To summarise these provisions, a teacher need not carry out all duties on the school premises and is statutorily required to prepare lessons, write reports and mark homework.
I fully recognise the burden on the teaching profession – this, according to the press, is even more the case now than 15 years ago when the statutory changes were made. As a corollary, I assume that virtually all teachers will be required by circumstance to perform some of their statutorily-defined duties in their own home.
However, I maintain that this is insufficient to give rise to any entitlement under ICTA 1988, s. 198.
The relevance of the statutory contract
If I understand Dr Booth’s assertions correctly, he is suggesting that a teacher has a right to a deduction because the duties are imposed by statute. However, the 1987 legislation makes no attempt to override the tax legislation. As a result, I do not see how the conditions of employment contained in one statute can have any bearing on the tax treatment (governed by another statute) of any expenditure purportedly incurred as a result. In other words, I submit that a teacher would be no more or less entitled to a tax deduction than if the same contractual terms were contained in a legally-binding customised agreement made between the teacher and the local educational authority for which the teacher worked.
I will now take this argument one stage further. Suppose another professional employee (for example a solicitor or accountant) were contractually required (implicitly or explicitly) by their employer to perform duties of their employment at home. It seems that any right of a teacher to claim a deduction under ICTA 1988, s. 198 ought to be equally appropriate to such other professional. (Whilst teachers, along with nurses and doctors, might gain more of a sympathy vote from the electorate (and therefore from politicians), many readers of this article might empathise with hard-worked solicitors and accountants who are contractually required to perform some work from home.)
The courts’ view of s. 198
One argument cited by Dr Booth (and by Andrew Flint in his comments in the March 2002 Tax Adviser) of the weakness of the Revenue’s stand against expense claims is that the Revenue cites two cases concerning travel expenses. That choice of cases might not be the wisest*, but that does not mean that the courts have been any more sympathetic to claims for expenses of maintaining a home. A recent authority is Kirkwood (HMIT) v Evans  BTC 50. A more established decision was in Roskams v Bennett (1950-1952) 32 TC 129. In both cases, a claim for the use of home was denied as falling outside the statutory requirements.
Are the courts wrong?
Dr Booth is right when he states that ‘the common law is about ... corrections’ and so, if the courts have previously erred, they can revisit the issue and overrule their earlier decisions. However, despite valiant efforts, no doubt, by some of the brightest practitioners at the bar, no court has yet queried the recognised interpretation of section 198. On the contrary in fact: many judges, as Dr Booth acknowledges, have apologised for the harshness of the rule; it is therefore suggested that these judges would strain to read the legislation favourably if they could find a way of doing so in order to alleviate the hardship. For example, Danckwerts J in Bennett stated at p. 132:
‘Rule 9 of Schedule E [the precursor of what is now section 198] is a very narrow and strict rule and it is one which undoubtedly causes a considerable amount of hardship when applied to particular cases. Judges dealing with particular cases have said so again and again. Their suggestions and their observations, however, have either fallen upon deaf ears or perhaps have not reached the ears which are relevant to an alteration of the law, that is to say the ears of persons who through the legislature decide these matters for other people.’
In the absence of such a move by any judge, it is submitted that the recognised interpretation of s. 198 must be correct.
However, even if one were to forget about the overwhelming precedents and consider the words of s. 198 afresh, I suggest that one would not reach a different conclusion.
The relevant parts of s. 198(1) read as follows:
‘If the holder of an office or employment is obliged to incur and defray out of the emoluments of the office or employment ...
(b) any amount (other than qualifying travelling expenses) expended wholly, exclusively and necessarily in the performance of the duties of the office or employment,
there may be deducted from the emoluments to be assessed the amount so incurred and defrayed.'
I suggest that it is impossible to read this rule without comparing it with the equivalent rule for Sch. D trading expenses in ICTA 1988, s. 74(1) (unfortunately for the reader couched in the negative). That reads as follows:
'... [N]o sum shall be deducted in respect of
(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation ...'
There are a number of significant differences in the wording. There is clearly the presence in s. 198 of the word ‘necessarily’. However, equally importantly, the expenditure in s. 198 must be incurred ‘in the performance of the duties of the office or employment. whereas s. 74 merely requires the expenditure to be ‘for the purposes of the trade [etc]’. It is submitted that this shows a further narrowing of the effect of s. 198. It is not sufficient that the expenditure can be related to an office or employment, but the expenditure must be incurred as an undeniable consequence of performing the duties of the office or employment.
It may be argued that a teacher who burns the midnight oil marking homework or otherwise performing what are undeniably the duties of the employment would not be incurring the fuel and lighting costs but for the performance of these duties. Whilst this might be difficult to prove, it is conceded that this will often be correct. But whilst this expenditure may be incurred (possibly even wholly and exclusively) in the performance of the duties, I maintain that it fails to meet the test of ‘necessity’. For this, one need only ask the teacher: did you contractually have to do the work where and when you did? The answer, I submit, will invariably be no. Not because there are plenty of practical alternatives – but in theory, at least, the teacher could have done this work elsewhere and using someone else’s light and heat.
Thirdly, there is the policy argument that can be discerned perhaps from the legislation. A deduction is available under the Schedule D rules for any expense that meets the required criteria. For Sch. E, the expenditure has to be defrayed ‘out of the emoluments of the office or employment’. It is submitted that Parliament was highlighting a key difference between the expenditure that an employee or office-holder is liable to incur and expenditure to be incurred by someone trading on their own account. On its own, an office or employment does not entitle the holder of the post to share in the profits of the employing enterprise. Thus very few individuals would take on an office or employment which would require them to spend considerable sums of their own money that will not be reimbursed. There will be occasions when employees are required to incur expenditure that is not reimbursed by the employer; and in these cases, the legislation rightly provides that relief should be due to the employee or office holder. However, the statutory provisions make it clear that such expenditure has to be defrayed out of the emoluments of the office or employment. This is not to say that the money used to meet these costs must directly come from the emoluments (without being mixed with other funds) – although I submit a harsher interpretation might have held sway in earlier times. Instead, the legislation is highlighting that relief under s. 198 is for the relatively rare situation that the employer does not fully meet the costs of the office or employment. A personal choice (albeit Hobson’s in many cases) will mean that the expenditure will fall wide of this narrow provision.
Thus, even ignoring the precedents, it is submitted that the legislation precludes relief for a teacher’s use of a home.
The apparent inconsistencies of the court’s approach
Dr Booth refers to illogical inconsistencies of the courts in their interpretation of s. 198. Both of his articles refer to the judgment of Vaisey J in Lomax v Newton (1953) 3 TC 558. Referring to the words ‘wholly, exclusively and necessarily’, the judge said:
‘They are, to my mind, deceptive words in the sense that when examined they are found to come to nearly nothing at all.’
Read in isolation, it is easy to understand why one would consider the courts to have been inconsistent, because it appears that the judge was suggesting that the words were meaningless.
However, it is important to read the full context of those words and also the subsequent references to that passage by later judges. One will discover that, rather than illogically inconsistent, the worst that the judge can be accused of is unhelpful wording.
The full text of the paragraph from which this sentence was extracted reads as follows:
‘Before coming to the particular items, I would observe that the provisions of that Rule are notoriously rigid, narrow and restricted in their operation. In order to satisfy the terms of the Rule it must be shewn that the expenditure incurred was not only necessarily but wholly and exclusively incurred in the performance of the relevant official duties. And it is certainly not enough merely to assert that a particular payment satisfies the requirements of the Rule, without specifying the detailed facts upon which the finding is based. An expenditure may be ‘necessary’ for the holder of an office without being necessary to him in the performance of the duties of that office; it may be necessary in the performance of those duties without being exclusively referable to those duties; it may perhaps be both necessarily and exclusively, but still not wholly so referable. The words are indeed stringent and exacting: compliance with each and every one of them is obligatory if the benefit of the Rule is to be claimed successfully. They are, to my mind, deceptive words in the sense that when examined they are found to come to nearly nothing at all.’
The case concerned a claim by an officer in the Territorial Army for relief in respect of the following deductions:
- mess subscription;
- share of mess guests expenditure;
- payments to batman;
- hire of camp furniture;
- cost of hotel accommodation in excess of allowance; and
- cost of tickets to sergeants’ dances, etc.
As may be predicted, most of the claims were rejected outright by the court as they did not meet the conditions of the stringent test. Only one of the claims succeeded – that was in respect of the excess cost of the hotel accommodation. Rather than set a precedent for such expenses in future, the judge made it quite clear why he was allowing the claim:
‘No doubt his attendance at these conferences and exercises was compulsory, and he had no choice. I am told, of the hotels at which he had to put up, and no doubt the supplementing of the prescribed allowances is a serious burden on a Territorial officer.
My chief difficulty as regards this item is the paucity of the evidence. The Commissioners have, however, found as a fact that this was expenditure necessarily, exclusively and wholly incurred in the performance of the Respondent’s duties, and I cannot say that they were wrong in bringing this fifth item within the Rule. Bolam v. Barlow 31 TC 136, and Ricketts v. Colquhoun 10 TC 118, may be rather difficult to reconcile with Nolder v. Walters, but I decide this matter on the ground that I must not disturb a finding of fact which was a possible finding both as to quantum and otherwise. I am by no means sure that I should myself have decided this point as the Commissioners did. While I feel bound to regard this item of £6 as having been admitted on a finding of fact which I cannot disturb, I venture to recommend that, as a precedent in other cases, it should be applied with very great caution. A hotel bill is certain to include charges for ‘extras’ involving some measure of extravagance and personal indulgence as well as charges for necessaries, and it is really only the latter which should have been taken into consideration by the Commissioners in the present case. In view of their finding, however, I suppose that I must assume that that is what they did.’ [emphasis added]
It is clear, therefore, that Vaisey J felt constrained to allow the claim due to insufficient evidence to overturn the Commissioners’ finding of fact whereas the judge’s instinct would have been to disallow it. Such sentiments do not support the view that the judge was suggesting any impotency of the words now found in s. 198.
The above paragraph has been cited with approval by a number of judges in the past 50 years. A number, interestingly, have not repeated the final sentence. For example, Lord Templeman in Smith v Abbott  BTC 66. Perhaps, this is as Dr Booth suggests, indicative of an illogical inconsistency. However, I submit that this is (if anything at all) merely out of concern that the last sentence can (out of context) be misconstrued. This view is taken because no judge has chosen to criticise these words or suggest that they mean anything other than the meaning submitted above.
On the relatively few occasions that the final sentence has been cited, every judge has upheld the rigidity of the rule in s. 198. For example, in Sanderson (HMIT) v Durbidge (1956) 36 TC 239 (a case that concerned a deduction for evening refreshments purchased by a local councillor), Wynn-Parry J commented (at p. 242):
‘With the whole of that paragraph, and particularly the last sentence, I find myself in respectful agreement.’
It is submitted that Wynn-Parry J must have understood the words ‘nearly nothing at all’ as referring to the expenditure that qualifies for relief rather than suggesting any impotency of the words. This is evidenced by the judge’s allowing the Revenue’s appeal in the case.
Employees who can readily obtain relief under s. 198
The Inland Revenue manuals (at SE32775) list six classes of employee for whom a deduction is available. They are:
- insurance agents;
- university lecturers;
- ministers of religion; and
For insurance agents, the relief is only available:
‘If it is necessary for a worker to provide office accommodation at home because there is none available to him at the company's office or because it is impractical for him to maintain all his records there because of its distance from his home.’
For university lecturers, an allowance might be available to someone:
‘involved in higher education (i.e. degree level work) who can show that a study is required by the nature of their duties and is not used merely as a matter of convenience.’ (SE70713)
Councillors are given a deduction ‘where it is necessary for a councillor to provide facilities at home’ (SE65955) – although for convenience a flat-rate deduction of £120 is usually given.
The reference to examiners, however, is misleading as they are treated in the same way as all other employees (SE62920).
Ministers of religion have a special code dealing with their expenses (ICTA 1988, s. 332) and therefore it is not wholly appropriate to consider them further here.
Midwives qualify only if they visit patients in the patients’ homes (i.e. they are domiciliary midwives) and in the absence of other facilities they maintain a room at their own home (SE66400).
It is suggested in the preceding articles that teachers are excluded from this list and that this calls for a challenge through the European courts. However, it seems that the criteria applying to the above categories of employee do not generally apply to teachers – so that there seems to be little merit in the argument that there is discriminatory treatment.
- The insurance agents only qualify if (inter alia) their home constitutes their main working place. Notwithstanding the number of hours spent on activities outside the classroom, it is hard to sustain the argument that the main working place is anywhere, but the school.
- The university lecturers are required to show that the use of home is not a matter of convenience. As implied above, and as stated by Dr Booth, ‘teachers will decide when and where to undertake such work’. It is therefore argued that the choice of home cannot be anything but a choice of convenience.
If there is one category of teacher that might be entitled to relief – that will be the peripatetic teacher with no single base. This will be akin to the domiciliary midwife.
The way forward
With the exception of the peripatetic teachers, it appears that there is little legal support for a claim by a teacher under s. 198. If a teacher was to make a unilateral claim for relief, the chances are that it would be rejected in most cases or reluctantly accepted as de minimis in others. In most cases, it is thought that a rejected application will be the end of the matter as the costs of challenging a refusal would usually far outweigh any benefits – even if the teacher were initially to obtain the services of a tax adviser pro bono.
If there is to be any general move for relief, this will have to come from representations by the teaching unions to the Revenue, because it is unlikely that the courts alone would require a change in the current practice.
* although they do provide a good analysis of the meaning of 'necessarily'.
Keith M Gordon MA(Oxon) ACA ATII is a chartered accountant and tax adviser. He is a director of ukTAXhelp Ltd. and can be contacted by e-mail: keith.gordon@ukTAXhelp.co.uk. The views expressed in this article are those of the author.
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