CHILD
CARE EXPENSES of a self-employed person – whether deductible – no – whether Human
Rights Act 1998 applies to a tax year before coming into force where the act of
disallowance took place afterwards – no – whether the point is covered by primary
legislation – yes – whether article 1 protocol 1 and article 14 of the Human Rights
Convention apply – no – whether articles 8 and 14 apply – no
- This
is an appeal by Miss Nena Maria Carney against an amendment to a self-assessment
for 1998/99. The Appellant was represented by Mr William Currey and the Inspector
by Mr Ian Mitchell.
- The
only items in dispute are the deductibility of nursery costs of £1,534 and playgroup
costs of £104 in computing the profits of the Appellant as a self-employed graphic
designer.
- Both
parties provided skeleton arguments. I had a witness statement from the Appellant
but she did not give oral evidence. After Mr Mitchell’s opening speech Mr Currey
asked if he could have further time to reply to the human rights points in writing
to which I agreed and Mr Mitchell made written comments on his reply.
- The
Appellant’s witness statement says that he works from her home and her work involves
clients and suppliers visiting. She has two children, born 26 September 1994 and
15 July 1997. She found it unprofessional and embarrassing to have children running
around and playing in her working environment while third parties are visiting.
She did not want the sound of children in the background when she was telephoning.
She also has to visit clients regularly. She says that her object in making the
payments for a nursery facility was to stop losing clients and to be able to have
clients and suppliers visit her with the appearance of a business-like office/studio
at her home. But for her business it was unlikely that the children would be sent
to nursery care.
Whether
the expenditure is disallowed
- Mr
Currey contends that the expenditure was wholly and exclusively incurred for the
purposes of her trade within section 74(1)(a) of the Taxes Act 1988. Mr Mitchell
does not argue the expenditure being included in the accounts but contends that
they are disallowed under that provision and also paragraph (b) as:
"any
disbursements or expenses of maintenance of the parties, their families or establishments,
or any sums expended for any other domestic or private purposes distinct from
the purposes of the trade, profession or vocation."
- Both
parties referred to a number of familiar authorities on section 74(1)(a). I can
start with the following summary from Vodafone Cellular Ltd v Shaw [1997]
STC 734, 742e:
The
leading modern cases on the application of the "exclusively" test are
Mallalieu v Drummond [1983] AC 861 and Mackinlay v Arthur Young McClelland
Moores & Co. [1990] 2 AC 239. From these cases the following propositions
may be derived:
- The
words "for the purposes of the trade" mean "to serve the purposes
of the trade". They do not mean "for the purposes of the taxpayer"
but for "the purposes of the trade", which is a different concept. A
fortiori they do not mean "for the benefit of the taxpayer."
- To
ascertain whether the payment was made for the purposes of the taxpayer’s trade
it is necessary to discover his object in making the payment. Save in obvious
cases which speak for themselves, this involves an inquiry into the taxpayer's
subjective intentions at the time of the payment.
- The
object of the taxpayer in making the payment must be distinguished from the effect
of the payment. A payment may be made exclusively for the purposes of the trade
even though it also secures a private benefit. This will be the case if the securing
of the private benefit was not the object of the payment but merely a consequential
and incidental effect of the payment.
- Although
the taxpayer’s subjective intentions are determinative, these are not limited
to the conscious motives which were in his mind at the time of the payment. Some
consequences are so inevitably and inextricably involved in the payment that unless
merely incidental they must be taken to be a purpose for which the payment was
made.
To
these propositions I would add one more. The question does not involve an inquiry
of the taxpayer whether he consciously intended to obtain a trade or personal
advantage by the payment. The primary inquiry is to ascertain what was the particular
object of the taxpayer in making the payment. Once that is ascertained, its characterisation
as a trade or private purpose is in my opinion a matter for the Commissioners,
not for the taxpayer. Thus in Mallalieu v Drummond the primary question was not
whether Miss Mallalieu intended her expenditure on clothes to serve exclusively
a professional purpose or partly a professional and partly a private purpose;
but whether it was intended not only to enable her to comply with the requirements
of the Bar Council when appearing as a barrister in Court but also to preserve
warmth and decency."
I
should also refer to the following passage from Mallalieu v Drummond [1983]
STC 665, 668j and 669e:
The
words in the paragraph "expended for the purposes of the trade, profession
or vocation" mean in my opinion "expended to serve the purposes of
the trade, profession or vocation"; or as elaborated by Lord Davey in Strong
& Co of Romsey Ltd v Woodifield [1906] AC 448, 453 "for the purpose
of enabling a person to carry on and earn profits in the trade etc." The
particular words emphasised do not refer to "the purposes" of the taxpayer
as some of the cases appear to suggest: as an example see the report of this case
[1983] 1 W.L.R. 252, 256. They refer to "the purposes" of the business
which is a different concept although the "purposes" (i.e. the intentions
or objects) of the taxpayer are fundamental to the application of the paragraph…..
The
object of the taxpayer in making the expenditure must be distinguished from the
effect of the expenditure. An expenditure may be made exclusively to serve the
purposes of the business, but it may have a private advantage. The existence of
that private advantage does not necessarily preclude the exclusivity of the business
purposes. For example, a medical consultant has a friend in the South of France
who is also his patient. He flies to the South of France for a week, staying in
the home of his friend and attending professionally upon him. He seeks to recover
the cost of his air fare. The question of fact will be whether the journey was
undertaken solely to serve the purposes of the medical practice. This will be
judged in the light of the taxpayer's object in making the journey. The question
will be answered by considering whether the stay in the South of France was a
reason, however subordinate, for undertaking the journey, or was not a reason
but only the effect. If a week’s stay on the Riviera was not an object of the
consultant, if the consultant’s only object was to attend upon his patient, his
stay on the Riviera was an unavoidable effect of the expenditure on the journey
and the expenditure lies outside the prohibition in section 130.
- The
two possible answers to the question of what was the Appellant’s purpose in incurring
the childcare expenditure are (1) to prevent the clients being put off by interruptions
from children and to enable her to work without distraction, in which case having
her children looked after is not a purpose but merely an effect of the expenditure,
and (2) to have the children properly looked after while she worked. I accept
that (1) was one of the purposes and that it served the purposes of the
trade. The Appellant says that (1) was her only purpose but she has not
been cross-examined on this. I am unable to accept that (1) was her only purpose.
It seems to me inconceivable that (2) was not also a purpose of the expenditure,
in which case the expenditure has a dual purpose, and is not wholly and exclusively
incurred for the purpose of the trade. I accept that, but for her trade, she would
not have incurred the expenditure, but when incurring the expenditure she must
have had the purpose of having the children properly looked after as well as serving
the purposes of the trade. Even if I had accepted that this was her only conscious
purpose, I find that (2) was an unconscious purpose. It is inconceivable that
it is not an unconscious purpose just as the purpose of clothes in Mallalieu
was to provide warmth and decency. Accordingly the expenditure is disallowed.
- I
also agree with Mr Mitchell that paragraph (b) disallows the expenditure as maintenance
of the parties or their families, for which there is no purpose test; or as sums
expended for any other domestic or private purposes distinct from the purposes
of the trade, profession or vocation, which does contain a purpose test that I
have decided is a domestic or private purposes distinct from the purposes of the
trade.
The
Human Rights Act 1998
Retrospectivity
- The
Appellant raises human rights arguments in addition. Mr Mitchell contends that
since the Human Rights Act 1998 came into force on 2 October 2000 it cannot affect
the Appellant’s tax for 1998/99 under a self-assessment return submitted on 2
June 1999. Mr Curry contends that the relevant act was that of the Inspector amending
the self-assessment disallowing the expenditure on 17 October 2000. The Appellant’s
case is really that the tax legislation is wrong in not allowing the deduction
(whether this is correct I will consider below), not that the Inspector acted
on the basis of the legislation. By section 3 of the Human rights Act 1998 "So
far as it is possible to do so, primary legislation and subordinate legislation
must be read and given effect in a way which is compatible with the Convention
rights." The act of disallowing the deduction follows from the legislation.
A similar point arose in Britax International GmbH v IRC [2002] EWCA Civ 806 in which the taxpayer argued in the Court of Appeal that the High Court’s
interpretation of tax legislation was in breach of section 3 of the Human Rights
Act. The Court after referring to the authorities that section 3 was not retrospective
said:
"the
events in question were the trading activities of Autolease during the accounting
period ending 31 December 1999; the issue in the proceedings is as to the tax
consequences of those trading activities. Plainly, [counsel for the taxpayer’s]
reliance on the 1998 Act requires that it should operate retrospectively in relation
to those trading activities, and to that issue, so as to produce a result (in
terms of the true construction of section 35(2) [of the Capital Allowances Act
1990]) which was not available under the law as it then stood. Accordingly, in
my judgment, [counsel for the taxpayer’s] third submission fails on the reprospectivity
issue."
The
same principle applies here. The issue is the deductibility of expenditure incurred
in a period before the Human Rights Act came into force. This is an appeal against
a 1998/99 self-assessment, not against an act taken by the Inspector on 17 October
2000 disallowing the expenditure. While there was an act of a public authority
which took place after the Human Rights Act came into force, just as there was
an act of a public authority after the Act came into force in Britax, the
effect of the Appellant’s submission is to achieve an interpretation of the tax
legislation which is to be applied retrospectively to a time before the Human
Rights Act was in force. I therefore agree with Mr Mitchell that the Act does
not apply. I will, however, consider the substantive points on the Act in case
I am wrong on this point.
Point
covered by primary legislation
- By
section 6(1) it is unlawful for a public authority to act in a way which is incompatible
with a Convention right. Section 6(2) provides a defence so that the prohibition
"does not apply to an act if (a) as the result of one or more provisions
of primary legislation, the authority could not have acted differently…."
Mr Mitchell contends that this is applicable here. I agree with him. The point
is covered by primary legislation, section 74(1)(a) and (b) of the Taxes Act 1988
which I have held disallows the expenditure.
Article
1 of the First Protocol and article 14
- Article
1 of the First Protocol of the European Convention on Human Rights provides:
"Every
natural or legal person is entitled to the peaceful enjoyment of his possessions.
No one shall be deprived of his possessions except in the public interest and
subject to the conditions provided for by law and by the general principles of
international law.
The
preceding provisions shall not, however, in any way impair the right of a State
to enforce such laws as it deems necessary to control the use of property in accordance
with the general interest or to secure the payment of taxes or other contributions
or penalties."
The
Appellant contends that the disallowance of the expenditure constitutes discrimination
within article 14 in relation to article 1:
"The
enjoyment of the rights and freedoms set forth in this Convention shall be secured
without discrimination on any ground such as sex, race, colour, language, religion,
political or other opinion, national or social origin, association with a national
minority, property, birth or other status."
- Mr
Curry contends that there is discrimination between an employer and the self-employed
in relation to child care in that an employer obtains a deduction for childcare
costs for employees on general principles and, subject to certain conditions,
an employee is not taxed on employer-funded childcare expenses (section 155A Taxes
Act 1988). Mr Mitchell contends first that this is not discrimination on the ground
of "other status," and secondly that, in general employers and the self-employed
are not similar, and in particular the Appellant’s situation is different from
that of an employer paying for childcare for other persons, its employees. An
employee is in the same position as a self-employed person; neither can deduct
childcare expenses. If the Appellant operated through a limited company so that
the company obtained a deduction and the Appellant was not taxed (assuming that
the conditions in section 155A were satisfied) he contended that the situation
of the Appellant as a sole trader was different from that of a director and shareholder
of a company, and it was proper for the tax system to take this into account.
- On
the question whether there is discrimination on the ground of "other status,"
the European Court of Human Rights in Kjeldsen Madsen and Pedersen v Denmark
Application Nos. 00005095/71; 00005920/72; 00005926/72 (1976) 1 EHRR 711
stated:
"The
Court first points out that Article 14 prohibits, within the ambit of the rights
and freedoms guaranteed, discriminatory treatment having as its basis or reason
a personal characteristic ("status") by which persons or groups of persons
are distinguishable from each other."
Here
any discrimination is financial and does not depend on status in the sense used
by the court..
- I
was not referred to any authority where different treatment between an employer
and a self-employed person was held to be within article 14. Mr Mitchell pointed
out that the Commission on Human Rights declared a claim inadmissible and accepted
a distinction in taxing rules between employed and self-employed persons in X
v Austria, Application No 6163/73. In that case employed persons paid
tax at fixed rates and self-employed at progressive rates and employees receiving
special payments obtained preferential tax treatment. The Commission found that
different tax treatment was justified and not discriminatory. I am aware of other
cases to the same effect in relation to national insurance contributions: National
Federation of the Self-Employed v UK, Application No.7995/77 and Juby v
UK No.11592/85. The same must apply to childcare expenses. An employer obtains
a deduction for childcare expenses for employees as the provision of a benefit
to its employees; the employee is not taxed on that benefit, perhaps because it
is difficult to value the benefit to a single employee, but the employee cannot
deduct the expense if he or she incurs it. The Appellant as a self-employed person
paying childcare expenses for herself is not in a similar situation to an employer
paying for an employee. There is no discrimination within article 14 to which
article 1 of Protocol 1 can apply.
Articles
8 and 14
- Mr
Curry also relied on article 8 in conjunction with article 14. Article 8 headed
Right to respect for private and family life provides:
"1.
Everyone has the right to respect for his private and family life, his home and
his correspondence.
2.
There shall be no interference by a public authority with the exercise of this
right except such as is in accordance with the law and is necessary in a democratic
society in the interests of national security, public safety or the economic well
being of the country, for the prevention of disorder or crime, for the protection
of health or morals, or for the protection of the rights and freedoms of others."
- The
issue here is whether paying more tax is an interference with the right to respect
for the Appellant’s private and family life, her home or her correspondence. I
was not shown any authority where article 8 was held to include substantive tax
rules, as opposed to procedural matters, such as the exercise of powers to obtain
information. It is not a natural reading of those words that substantive tax liability
is covered. I do not think that article 8 is potentially breached. For the reasons
already given I do not consider that article 14 is applicable to the distinction
between an employer and a self-employed person in relation to article 8.
- Mr
Mitchell pointed out that the government does now provide help for some childcare
expenses equally for the employed and the self-employed through the childcare
tax credit as part of the working families tax credit. The childcare tax credit
covers up to 70 per cent of eligible childcare costs of up to £135 per week for
the first child and £200 per week for two or more children.
- Accordingly
I dismiss the appeal in principle.
DR
JOHN F. AVERY JONES
