| Employment Income: Deductions and Expenses |
29 |
Had he succeeded in establishing two places of work as the taxpayer did in Owen v Pook, the first and last expenses might well have been deductible. |
The discrepancy creates tax planning problems. If Tom, a trader, incorporates his business, his allowable expenses will fall under schedule E. Some who fall within schedule E try to avoid the problem by forming a management company which employs them: their own expenses remain under schedule E, but the company may, in computing its profits, deduct expenses not deductible by an individual employee. The essence of this distinction is that schedule E requires that the expense be necessarily incurred in the performance of the duties, while schedule D is satisfied with a purpose test. |
However, the discrepancy can be exaggerated. First, many expenses disallowed under schedule D are similarly disallowed under schedule E. Thus, travelling expenses from home to work are disallowed under both schedules,127 as are other expenses of a personal nature, such as living expenses. Secondly, it must be noted that some expenses allowed under schedule D may subsequently be recouped by the Revenue as, for example, where trading stock is bought and later sold or valued at market value on discontinuance.128 Again, the cost of a home office which is allowed under schedule E will not affect the exemption of the principal private residence from CGT, whereas the same allowance under schedule D will result in a partial loss of that exemption. Thirdly, there remains the crucial difference between an employment and a profession or trade, and between being a servant and being an owner. If E, an employee, incurs expense for his employer, E’s employer may reimburse the expense, whereas a trader has to bear the expense itself. Unfortunately, the reimbursement may be taxable, especially where TA 1988, section 153 is in issue, as in Smith v Abbott.129 The parties have two solutions. One is for the employer to incur the expense, so excluding section 153; the other is to increase the employee’s wages sufficiently to cover the taxable reimbursement. |