06 Nov Stringfellows v HMRC

Summary of Case Law

Gemma Daniels, who worked at the central London club as a self-employed “exotic dancer. Ms. Daniels claimed tax relief for her work clothing, lingerie, dry-cleaning, make-up, beauty treatments and hairdressing including hair extensions

HMRC enquired into her 2014 tax return, and then looked back to the years 2011 to 2013. HMRC was prepared to accept a figure of 20% of the expenses claimed as being allowable and then charged penalties under Schedule 24 penalties for error, on the basis that she had been careless.

HMRC ruled Ms. Daniels could not claim for travel and clothing as tax-deductible.

Ms. Daniels, the taxpayer appealed the assessment and penalties. An appeal at the Tax Chamber sitting at Taylor House, London ruled claims for clothing, dry cleaning and cosmetics were permitted, but travel expenses were not.

The First Tier Tribunal judge Guy Brannan said: “In the present case, we accept Ms. Daniels’ evidence that the dresses that she acquired in order to perform at Stringfellows were not appropriate to be worn outside that club and that she purchased them only for the purposes of her performances.

“She described them as ‘see-through’ and ‘skimpy’, they were often decorated with sequins in order to catch the lights under which she performed.

“The dresses worn by Ms. Daniels could not be described as providing ‘warmth and decency’.

“Indeed, we are satisfied that the objective of Ms. Daniels in acquiring the dresses was the reverse of the objective of the provision of ‘warmth and decency’.

“Accordingly, we have concluded that the expenditure incurred by Ms. Daniels on these dresses is deductible.”

Lessons to learn from tax advisors in this case summarised as follows

HMRC has two approaches to the clothing expense:

• the expenditure had been incurred but was not tax deductible
• no allowance could be made in any case because the taxpayer had not retained receipts for 80% of the expenditure hence had not demonstrated that the expenditure had been incurred.

The Judge stated that HMRC cannot argue that the expenditure was not actually incurred despite the lack of receipts, as to do so would be an allegation of dishonesty when no such allegation had been advanced. It has always been a myth that no receipt automatically means no deduction, but that is an argument often advanced by HMRC. The Judge’s comments, in this case, are therefore welcome by many best tax advisors.

Secondly, the Judge noted that the inspector had a hard-nosed attitude from the outset of the case which soured the relationship with the taxpayer’s advisor. This then had a direct impact on any potential penalty in respect of travel expenses, which were ruled as disallowable.

The Judge concluded that HMRC must take some responsibility for the alleged “obstreperous” behavior by the agent, which initially led HMRC to restrict the available penalty reduction.

The Judge added that the agent’s robust advocacy and support of his client’s case should not be held against him. This makes it clear that HMRC’s behavior, as well as the taxpayer’s, can have a direct impact on penalties. Robustly defending a client in appropriate circumstances is the right thing to do, not a weapon for HMRC to use by threatening increased penalties if the agent does not do as the inspector wishes.

Bala’s comment

This is First Tier Tribunal decision. We don’t have all the fact of the case.

It could have been argued that whilst the First Tier Tribunal had the benefit of being able to read the 2014 decision by the Upper Tribunal in Dr Samad Samadian v HMRC [2014] UKUT 0013 (TCC) , which is after all, the only case that her really established the rules for taxpayers travelling to regular and predictable workplaces, neither the taxpayer (or their adviser) would have had that information to hand when preparing tax returns before then.