Lorber v Revenue & Customs [2011] UKFTT 110 (TC)

FTT-Tax
Lorber v Revenue & Customs
[2011] UKFTT 110 (TC) · 2011-02-09
[1]This decision concerns an expenses claim made by Mr Paul Lorber for the year ended 5 April 2003. The claim had been partially refused in a letter from the Inspector of Taxes of 17 February 2005. Mr Lorber appeals against the decision to the extent that it disallows his expenses claim.[2]In the year in question Mr Lorber was an elected borough councillor in the London Borough of Brent. He had been a councillor for over twenty years and was the leader of a group of ten Liberal Democrat Councillors. He received a “councillor’s allowance” of £7,000 a year and a special responsibility allowance of £4,500 a year. A short summary of the disputed expenses is as follows:(i) £2,006.80 of “home expenses” were claimed and one-sixth of that (£334.40) was offered.(ii) £80 was claimed for costs of child minding: this was wholly disallowed.(iii) A further amount was claimed in respect of “subscriptions and publications”: this was wholly disallowed.(iv) £1,200 was claimed as “communication” expenses: this was wholly disallowed. Allowances[3]The main local authorities in England and Wales are bound by the Local Authorities (Members’ Allowances) Regulations 1991 (SI 1991/351) to establish a scheme of allowances for their elected members. As a result of amending regulations made in 1995, local authorities are free to set their own levels of allowances, in the light of local circumstances, without any reference to ceilings set by the Secretary of State.[4]The remuneration of councillors in London was reviewed in the summer of 2003 by an Independent Panel to the Association of London Government. We use this as the source of our information on the basis that it drew on the system of allowances as the Panel had found them.[5]Paul Lorber, as noted, received a basic allowance. Every local authority is expected to have a basic, flat rate allowance which is payable to all members. The basic allowance recognises the time commitment of councillors, including meetings with council managers and constituents and attendance at political group meetings. It is also intended to cover incidental costs such as the use of councillors’ homes. It must be the same for each councillor and may be paid either as a lump sum or in instalments through the year.[6]Mr Lorber also received a special responsibilities allowance. This was paid to reflect the additional responsibilities and time commitments that he had undertaken.[7]Mr Lorber provided us with an explanatory paper produced by the Department for the Environment, Transport and the Regions. This described those two allowances as being made “both to meet expenses and to provide remuneration”. The tax provisions[8]Council members are office holders and earnings received from their office are taxable in the same way as any other individual who holds an office or an employment; they are chargeable to income tax as employment income. There was a suggestion from Mr Lorber in the correspondence he had with HMRC that the allowances were not taxable, but the point was (rightly) not argued by Mr Lorber at the hearing. Such income, referred to as earnings, includes allowances paid to cover expenses incurred in carrying out the duties of the office, unless those allowances do no more than reimburse expenses actually incurred and which are deductible for tax purposes. The provisions relating to expenses in the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) (which came into force for the tax year 2002/3, the year with which we are concerned) are in all material respects the same as the provisions that they replaced in the Income and Corporation Taxes Act 1988 (“ICTA”). The effect of these provisions is that a local government councillor can get a tax deduction for amounts which he is obliged to incur and pay as holder of the office and which he has incurred wholly, exclusively and necessarily in the performance of his official duties - see section 336 ITEPA. These rules (and their forebears) have been interpreted as establishing that the fact that an office holder is encouraged, expected or required to incur a particular expense is not conclusive evidence that it is “necessarily” incurred. Moreover, the expense must be dictated by the requirements of the “job” itself and not by the personal circumstances of the office holder. And strictly, as Warner J observed in Smith v Abbott [1991] STC 661 at 684, this “necessity test” will be satisfied only if any and every holder of the employment would have to incur the particular expense. The home expenses 8. HMRC have allowed one-sixth of Mr Lorber’s home expenses which comprised council tax, gas and electricity bills for 2002/03. Mr Lorber’s evidence was that he used one bedroom in his house as an office. In addition he used other rooms in the house for meetings with his colleagues and visits from constituents.[9]We understand that HMRC accept that some part of a councillor’s home expenses are “necessarily incurred” in the performance of the councillor’s duties. For the year in question HMRC initially allowed a “standard” deduction of £135. This was the amount included in an agreement between HMRC and the Association of Local Councillors which is set out in HMRC’s Employment Income Manual at paragraph EIM65955 and which in part says (with later amendments):
“Household expenses Where it is necessary for a councillor to provide facilities at home, to do some of his or her work as a councillor, a deduction can be given for the additional costs incurred such as heating and lighting. Following discussions it has been agreed with the Inland Revenue that a standard deduction of [£135 per annum with effect from 2002/03] can be given.”
The same paragraph of the EIM goes on:
“If a room is used exclusively for council business, a claim may be made for the proportion of Council Tax, heat and light relative to that room.”
This paragraph is we assume the basis for HMRC’s agreement to allow one-sixth of the total expenses incurred by Mr Lorber on his house, and as set out in his claim.[10]Mr Lorber, at an early stage of the correspondence, was asked by HMRC to provide information about his home expenses claim and he replied in a letter of 24 February 2005 as follows:
“… I use my home on a daily basis to perform my functions. My home has an allocated room which I use as a study for my Council work, it has desks, computer, phone etc., in addition I use other parts of my house for meetings with my colleagues and constituents. I do not accept the ludicrous £135 “home use” allowance. My Council Tax is around £1,500, Home Insurance is around £300, Gas and Electricity around £500, Water rates around £200 plus wear and tear etc. Your predecessors have accepted my claims for the past twenty years. I fail to see what has changed.”
[11]While the actual figures provided by Mr Lorber may be correct, neither HMRC nor this Tribunal have been provided with any information about how many rooms have been occupied for meetings etc. and for how much time they have been used for those purposes. There is therefore no way by which we (and HMRC) can determine how much more Mr Lorber incurred each year, over and above what it would otherwise have cost him to run his house for his private use, to provide space for meetings. Bearing in mind that HMRC have offered to provide one-sixth of his total costs of £2,006.80 (i.e. £334.40) for the twelve months to 5 April 2005, as presumably representing the costs associated with the one room which Mr Lorber had dedicated to council business, that amount seems to us to be perfectly reasonable in the absence of any better evidence. We therefore direct that the home expenses claim be restricted to £334.40 for the year. Child care[12]Mr Lorber explained in a letter of 1 December 2004 that a small part of his councillor’s allowance is “used to pay the occasional child minding costs (eight times in 2002/3) when I could not get friends or family to look after my young children.” In a later letter of 24 February 2004 Mr Lorber says, in connection with child care costs, that the basic allowance had been “set at a level that meet these out of pocket expenses and ensure that Councillors are not out of pocket”. He states in that letter that the cost of child care is covered in a number of documents (which he enclosed with the letter of 24 February 2005 but which were not produced in evidence).[13]When we read the Independent Panel’s “Review of Councils in London: 2003 Review” produced in the summer 2003 we noted that they expressed the view that allowances should be paid to the councillor, at a rate to reflect local costs, before expenses of arranging the care of children while the councillor is attending, among other things, council and committee meetings. That recommendation no doubt reflects the fact that, for tax purposes, child care expenditure is not allowable as a deduction in computing taxable earnings. This is because child care expenses are not dictated by the requirements of the job of being a councillor; instead they have to be incurred to meet the personal circumstances of the councillor (and see Halstead v Condon (1970) 46 TC 289). And that is the reason why, we think, HMRC were correct in disallowing Mr Lorber’s claim for £80 for child minding expenses. Subscriptions and publications expenditure[14]Mr Lorber has claimed an unspecified amount for subscriptions and publications. His claim is expressed in his letter to HMRC of 1 December 2004 as follows:
“The Government is constantly passing new laws impacting on Local Government and passing on new responsibilities. There has been a massive growth in a new “Training of Councillors’ Industry and I am flooded by constant invitations to Seminars and Training Sessions. The only problem is that they cost at least £250 a time. A much cheaper and better alternative is a service provided by the Association of Liberal Democrat Councillors who provide publications advising on new developments and issues and on best practice. They also publish helpful publications to assist my Leadership and Representative role. They also provide advice on the phone which I use regularly. The annual subscription is around £60 and the rest is spent on publications on things like new scrutiny functions etc.”
HMRC have refused the relief on the grounds that the costs of subscriptions and publications are not incurred in the performance of the duties; “they merely put you in a better position to perform those duties.”[15]The decision in 1925 of Simpson v Tate , 9 TC 314, established that a subscription to a professional body paid by an employed county medical officer of health was disallowed as a deduction; this was based on reasoning that the subscription was not “necessary”, in that other individuals could have performed the duties of the particular office without being a member of the professional body. By parity of reasoning, a subscription by a councillor to the Association of Liberal Democrat Councillors in return for which the councillor gets its publications and has access to information is not “necessary”; other councillors can carry out the duties without receiving the benefits provided in return for a subscription to that Association. We have been provided with no details of the publications obtained by Mr Lorber in return for his subscription. We have to infer that there is nothing exceptional about them that takes them outside the general rules set out above. Moreover, it appears to us that the material obtained by Mr Lorber is not “job specific” (i.e. to deal with the immediate problems before him) but more generally qualifies him the better to carry out the duties of his office. For that reason we are bound by authority to disallow this expenditure.[16]Section 201 of ICTA and section 343 to 345 ITEPA allow a deduction for subscriptions to approved societies. Mr Lorber has not satisfied us that the Association of Liberal Democrat Councillors is an approved society for this purpose. Communication expenses[17]In his letter of 1 December 2004 to HMRC Mr Lorber stated as follows:
“… seeking our residents’ views and informing them what we are doing and what is going on at the Council is an essential part of our role. Together with my two colleagues in my ward we produce a regular monthly newsletter supplemented by survey forms and numerous special “street letters” which deal with a variety of issues including planning applications, repairs to roads, Council events etc. To have 5,000 Newsletters printed and folded commercially cost around £150 a time with envelopes on top. To save on costs we have pooled our resources and spent around £10,000 between us on our own printing and folding equipment. This has halved the cost and we now only purchase paper, ink and envelopes and contribute a monthly amount to meet these costs. I pay £100 per month or £1,200 a year.”
HMRC have refused the claim.[18]The question here is whether the communication expenses are incurred because Mr Lorber is obliged to incur and pay for them as an elected councillor and whether he has incurred them wholly, exclusively and necessarily in the performance of those duties.[19]The case for HMRC, presented by Mr I Allen, is that the relevant expenditure is neither exclusively nor necessarily incurred in the performance of Mr Lorber’s duties as a councillor. The Newsletters, he accepts, keep constituents informed as to the intentions of the councillor, but, he argues, the newsletters promote the Liberal Democratic Party specifically. Each newsletter includes a statement that it has been published on behalf of the Brent Liberal Democrats and it canvasses support for LDP campaigns and invites donations towards the cost of the campaigning leaflets. Thus, Mr Allen argues, the expenses in question are not incurred exclusively in the performance of Mr Lorber’s duties as a councillor. Mr Allen goes on to argue that the expenditure is not necessarily incurred in the performance of those duties. Mr Lorber would, contended Mr Allen, be able to perform those duties as councillor if the newsletters were not produced. What are the duties of a councillor?[20]We are not aware of any statutory job description for a local councillor. We start, however, by noting the contents of a statement on 1 August 2003 by the Parliamentary Under-Secretary of State, Angela Smith MP, announcing a review of councillors’ allowances. Councillors, she says, “have a rightful role to play in supporting their communities and representing the interests of their constituents.” A report dated 18 October 2006 from the Independent Panel on the Remuneration of Councillors in London contains “a job profile for councillors”. Under the heading “Purposes” this states: · To participate constructively in the good governance of the area. · To contribute actively to the formation and scrutiny of the authority’s policies, budget, strategies and service delivery. · To represent effectively the interest of the Ward for which the Councillor was elected and deal with constituents’ enquiries and representations. · To champion the causes which best relate to the interests and sustainability of the community and campaign for the improvement of the quality of life of the community in terms of equity, economy and environment. · To represent the Council on an outside body, such as charity trust or neighbourhood association.” “Key Tasks” include fulfilling “the statutory and locally determined requirements of an elected member of a council authority and the authority itself, including compliance with all relevant codes of conduct.” Also included are these tasks: · To represent the authority to the community, and the community to the authority, through the various forums available. · To develop and maintain a working knowledge of the organisations, services, activities and other factors which impact upon the community’s wellbeing and identity. · To contribute constructively to open government and democratic renewal through active encouragement to the community to participate generally in the government of the area. · To participate in the activity of any political group of which the councillor is a member.”[21]Brent Council’s website says that its ward representatives will “represent the views of their constituents”.[22]A 2005 publication of the Office of the Deputy Prime Minister (entitled “Vibrant Local Leadership”) records the Deputy Prime Minister (the Rt. Hon. John Prestcott MP) as saying that Councils have unique potential to bring people together and encourage them to work in partnership. “That is why we place such importance upon councillors and officers working with others who have leadership roles in communities.” The report emphasises the importance of having a group of elected representatives whose profile more closely reflects the communities being served and the development of “clearer and more visible local leadership that the public can more readily identify and understand”. Paragraphs 30 and 31 emphasise that “citizen engagement is critical to … the development of activities at a neighbourhood level, harnessing people’s interest in those areas that make a difference to their everyday lives.” It goes on to say that one of the key principles advanced for greater neighbourhood engagement is that neighbourhood arrangements, with particular reference to the word representation, “must be consistent with a local representative democracy that gives legitimacy to governmental institutions and places elected councillors as the leading advocates for their communities”. In paragraphs 36 and 37 the Report refers to the need “for locally elected representatives to act in a leadership role as advocates and champions of local communities, listening to local concerns and acting as their community advocates”.[23]We were provided with a short paper headed “Role of Liberal Democrat Councillors in Brent”. This states that the duty of the councillors is “to work as part of a Team – with fellow Liberal Democrat Councillors, other Liberal Democrat members and our helpers and supporters to achieve our objectives”. It goes on with these words:
“Your specific roles as a Community Councillor include: · Representing your ward and the residents who live in it on local issues. · Collecting the views of local residents through Focus leaflets, surveys and door-knocking exercises. · Regularly communicating with residents in your ward through our campaigning Focus Newsletter and regular street letters. · Keeping up-to-date on issues impacting on your ward. · Campaigning on local issues with and on behalf of local residents. · Raising issues of concern to your residents with Council Officers. · Dealing effectively with individual case work. …”
The same paper goes on to identify the councillor’s responsibility to the LibDem group. This includes “Working with and supporting your colleagues …”, “Communicating relevant information with the rest of the Team” and “helping to raise funds for campaigning expenses.” On what has the claimed expenditure been spent?[24]The evidence submitted jointly by HMRC and Mr Lorber included 10 newsletters and 14 “special street letters”. Every newsletter and every special street letter contains the footnote that it is published and provided by Paul Lorber for Brent Liberal Democrats.[25]Each of the newsletters names the same three Liberal Democrat Councillors (including Mr Lorber) as the sender of the letter describing it as a “letter from your Liberal Democrat Councillor” (sometimes referred to as the “Focus Teams”). None of those newsletters explicitly canvasses support for the Liberal Democrats. One only (referred to below) asks for support for a particular campaign and invites donations towards the cost of campaigning leaflets. We will in due course provide a summary of two such newsletters.[26]The special street letters (usually headed “FOCUS”) are directed at single issues, usually concerning residents in particular parts of the ward. Of the 14 such letters which we saw, four invite support from the recipients. One of them asks for help delivering “FOCUSES”. One (canvassing support for Maybank Open Space) asks for help delivering FOCUSES, collecting signatures, displaying the poster and making a donation to help pay for the leaflets/posters. One (concerned with road surfacing, parking and speeding on Sudbury Avenue) asks for help delivering leaflets, “displaying a poster at election time” and making a donation to help pay for FOCUS leaflets. One FOCUS Street Letter tells recipients when and where the monthly advice surgery is to be held and invites recipients to attend on a particular date to meet the neighbourhood police team. This last one also invites “the recipient to help by delivering FOCUSES, and to make “a donation to FOCUS” and to join the Liberal Democrats.[27]We move on now to examine representative examples of Newsletters and Special Street Letters. Newsletters[28]We have picked the first two newsletters of 2003 as representative. One of these directs attention to the rebuilding of Barham Park Estate. This contains the following passages:
“We share local residents’ frustration at the slow progress of the plans for rebuilding the Estate. Our priority has always been to ensure a fair deal and decent homes for local residents. It is accepted that the prefabricated buildings are in a poor state and hard to keep in good repair. Following independent surveys in 2002, it was agreed that the building of new homes will be the best solution. … residents know, the early ideas included building up to 600 homes in place of the existing 204 flats – including building blocks of flats on large parts of the Playing Fields. We oppose this because it would create overcrowding and local people would lose a large part of the playing fields. … We have made clear that large-scale building on the playing fields is not acceptable. We are organising a Meeting for January when we hope to update residents of the latest position and to consider options. We will of course keep you informed. With best wishes for a healthy and peaceful new year.”
This is signed by the three Liberal Democrat Councillors for Sudbury Ward (who include Mr Lorber).[29]Another newsletter produced at the start of the year is apparently directed at new residents. It comes from Mr Lorber himself “for Liberal Democrat FOCUS Team”. It reads: “Dear Fellow Residents WELCOME On behalf of the local FOCUS Team I would like to welcome you to our area. We hope that you have settled in well to your new home. The FOCUS Team exists to “campaign all year round” for local people on issues of local concern. Over the last year our campaigns included action on safety repairs to local play areas, calls for more police for Wembley, opposition to a large development on the St John’s church site, improvements to local bus services and many more … We are available to help local residents with any problems they have with the Council or any issue of concern. We hold monthly advice surgeries … We conduct regular surveys to identify local issues. Please contact me if I can be of any help in the future”.[30]Of the other newsletters, one directs the recipient’s attention to a controlled parking zone. It contains this passage:
“Please think carefully about this change and whether it is a good idea for your road – if you live near a school the new hours will NOT directly cover the usual drop off and pick up times and if you live near shops Saturday controls may be important to you.”
There is a newsletter that invites recipients to tell the FOCUS Team of refuse collection problems and others that ask for help in their campaign for cleaner streets, for less bus congestion and for better police protection including a CCTV system. The last of those asks for a £1 per household donation “to help pay for this and other campaigning leaflets”.[31]Generally speaking, the newsletters tell the recipients that the letters come from the Liberal Democrat Councillors and tell them how to contact their councillors. They identify campaigns on issues of local concern. They do not canvass the recipients to vote for or support the party nor do they explicitly canvass support for any campaign. Essentially the function of the newsletter is to make the constituents aware of what is going on, what is likely to affect them and what drives the FOCUS Team. The Special Street Letters[32]These are all quite short and to the point. One is headed “Extended hours at The Blackhorse Pub?” This informs the recipients of an imminent licensing application and informs them that the government policy on modernising licensing laws “may have an impact on local residential areas”. Another Street Letter is headed “Action for Sudbury Avenue”: it informs the reader that the avenue is crumbling away and is frequently full of potholes and it says – “For many years your Liberal Democrat Councillors have been calling on the Council to fully resurface the road”. Another Street Letter is headed – “Proposed Bus Lane in Watford Road”; it notes the opposition of local people and states that - “one of your Liberal Democrat Councillors will make representations on behalf of local people” at a meeting of the Brent Council’s Highways Committee “made of five Labour Councillors”. Conclusions on deductibility of the communications expenditure[33]Were the expenses of producing the monthly Newsletter and the Special Street Letters necessarily incurred by Mr Lorber in the course of his duties as a councillor? We think they were. Written communications addressed to his ward members were, we think, necessary to enable him to perform his duties as a councillor and in particular, to use the words in the job profile, “to represent effectively the interests of the ward … and deal with constituents’ enquiries and representations”. The task of representing the community to the local authority demands that the councillor informs himself of the needs of the ward and informs the constituents of the council’s plans and policies. Without communicating through newsletters and special street letters the councillor would be left with no effective means of carrying out his duties.[34]The real dispute turns on whether the expenses were exclusively incurred by Mr Lorber in the course of his duties as a councillor. That the expenditure was incurred the better to enable Mr Lorber to represent the interests of his constituents is not in doubt. The question is whether the expenditure was also incurred for the purpose of advancing the interests of the Liberal Democrats in Brent Council. If that were a purpose, then the purpose of the expenditure will not have been a qualifying purpose; the deductibility will therefore be ruled out because the expenditure will not have been exclusively incurred by Mr Lorber in performing his duties as a councillor. But if in the circumstances the expenditure has had the effect of advancing the interests of the Liberal Democrat Party without that being a purpose for the incurring of the expenditure, then the exclusivity of purpose will not be compromised. To put it another way, if the benefit to the Liberal Democratic Party were an incidental result, the purpose will remain exclusively that of enabling the better performance of Mr Lorber’s duties as councillor.[35]Mr Lorber was engaged and paid his allowances to be a councillor. He holds office by virtue of having been elected as a councillor and not because of his membership of the Liberal Democratic Party. The ODPM’s “Vibrant Local Leadership” publication states that there are something like 21,000 elected councillors in England and approximately 95% of councillors in principal authorities are elected under a party political label (see paragraph 88). Bearing in mind that a “key task” of a councillor is to participate in the activities of the political party of which the councillor is a member, it is self-evident that the circulation by a councillor of a newsletter or a special street letter which does not properly identify the councillor and the councillor’s party connection is pointless. It is equally self-evident therefore that a councillor who is a good leader and who runs successful campaigns will, incidentally, reflect well on the party. It follows that the purpose of the expenditure will depend on the circumstances and cannot simply be determined by the fact that the newsletter or the street letter has a councillor’s name and party printed on it.[36]We have made a close examination of the newsletters and the special street letters. Every one of these has the LDP label and states who the members of the group are (i.e. Mr Lorber and his two LDP colleagues). Every paper gives their address and most of them provide the means of communicating with them. Only one (the paper that advertises the Advice Surgery) out of the 24 papers invites the recipient to join the Liberal Democrats. None of the Street Letters canvass subscriptions to the Liberal Democratic Party; the two that ask for contributions state that the “donation” is to FOCUS which, as noted above, exists to campaign all year round for local people on issues of local concern. We had no evidence of what if any money was raised through the requests for contributions; the inference must be that any money so raised was to further the particular campaign. The final point in our overview of the facts is that none of the newsletters and street letters had anything to do with elections and none seeks to canvass the votes of the recipients. Only one of the 24 (i.e the paper that promotes the Advice Surgery) tells the reader how to help in campaigns, namely by joining the Liberal Democrats. We cannot see that factor as characterising the purpose of the disputed expenditure as party political.[37]It is in his leadership role and as “advocate and champion of the ward” (to use the words of the ODPM paper) that Mr Lorber incurs the expenditure to provide the newsletters and the special street letters. In that capacity he must of necessity communicate to enable him to listen to and evaluate the needs of his constituents. Being a member of the LDP is a reason why he was elected; and good representation will no doubt stand him and the Party in good stead politically. That is not however the reason for or the purpose of the expenditure on these communications. The expenditure is incurred to enable Mr Lorber to perform his duties as a local councillor to best effect. That, in the circumstances of the present appeal, is the only purpose.[38]For those reasons we think that Mr Lorber’s appeal succeeds so far as concerns the £1,200 expenditure on communications in the form of newsletters and special street letters.[39]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. SIR STEPHEN OLIVER QC RELEASE DATE: 9 February 2011