Nicholson v Revenue and Customs (INCOME TAX/CORPORATION TAX : Assessment/self-assessment)

Factual and Procedural Background

This appeal concerns a dispute over the deductibility of wages paid by the Appellant to his son during the tax year ending 5 April 2014. The Appellant submitted a self-assessment tax return claiming expenses including wages paid to his son, which HMRC challenged. Following a s 9A enquiry into the validity of the claimed expenses, HMRC allowed part of the expenses but disallowed £7,400 claimed as wages to the son, alleging these were not wholly and exclusively incurred for the purposes of trade. HMRC issued a Closure Notice on 26 February 2016, amended on 25 May 2016, reducing allowable expenses accordingly. The Appellant appealed this decision, maintaining that the payments were legitimate business expenses related to his trade, which included a central heating sales role and an internet business.

Legal Issues Presented

1. Whether the payments of £7,400 to the Appellant's son as wages were expenses wholly and exclusively incurred for the purposes of the Appellant's trade and thus deductible under s 34(1) of the Taxes Management Act 1970.
2. Whether HMRC's amendments to the Appellant's tax calculations disallowing these wages were correct and lawful.

Arguments of the Parties

Appellant's Arguments

• The Appellant claimed that the £7,400 wages paid to his son were for 15 hours per week at £10 per hour for promotional work including internet and leaflet distribution and computer tasks.
• He asserted payments were made partly in cash and partly in kind (food and drink), supporting his son while he was studying at university.
• The Appellant argued that without his son's assistance, he could not have maintained his business income, especially given his health issues.
• He contended that it was unfair to disallow the wages, citing the Equality Act 2010 and stressing that the payments reflected the son's skills and were necessary for his livelihood during university.
• The Appellant also referred to bank payments totaling £1,850 and a further £203.61 paid for his son's home insurance, which he felt were not properly considered by HMRC.

HMRC's Arguments

• The burden of proof rested with the Appellant to demonstrate that the £7,400 expenditure was incurred wholly and exclusively for the trade.
• HMRC emphasized the statutory requirement under s 34(1) TMA 1970 that expenses must be solely for trade purposes to be deductible.
• They noted the absence of contemporaneous records supporting the claimed wages and the inability to reconcile payments in bank statements as wages for services rendered.
• HMRC argued that the payments had a dual purpose: natural parental love and personal support for the son during university, rather than purely a business purpose.
• They cited relevant case law establishing that payments influenced by personal motives are not deductible business expenses.
• Accordingly, HMRC maintained that the disallowance of the £7,400 was correct as the payments were not wholly and exclusively for the trade.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal analysed the statutory framework under s 34(1) TMA 1970, which disallows deductions for expenses not incurred wholly and exclusively for the purposes of the trade. The court acknowledged the Appellant’s position that his son worked 15 hours per week and was paid wages accordingly. However, the absence of contemporaneous records or a reliable methodology for calculating hours and payments undermined this claim.

The Tribunal considered the nature of the payments, noting they were partly in cash and partly in kind (provision of food and drink), and that the son was a university student whose maintenance appeared to be supported by these payments. The court found that personal and familial motives influenced the payments, creating a dual purpose.

Applying the precedents, the Tribunal concluded that where payments are partly motivated by personal considerations such as parental support, they fail the wholly and exclusively test. The lack of direct correlation between work done and payments made further supported this conclusion.

Therefore, the Tribunal upheld HMRC’s decision to disallow the £7,400 wages as a deductible expense.

Holding and Implications

The Tribunal DISMISSED the appeal and confirmed HMRC’s Closure Notice and amendments disallowing the £7,400 wages paid to the Appellant's son.

The direct effect is that the Appellant’s claim for these wages as deductible expenses against his self-employment income for 2013-14 is rejected. No new legal precedent was established; the decision reaffirmed existing principles that expenses must be incurred solely for trade purposes to qualify as deductions.