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John Newth concludes his review of the special tax provisions that affect practising barristers, focusing on the tax surrounding expenses and barristers’ clerks.
In Part 1 (Counsel June 2012), I dealt with the end of the cash basis and the consequences of having to include work in progress at full value after June 2005. The effect of these provisions on newly qualified barristers, and numerical examples showing how the statutory changes could work in practice, were also included. In this article I turn to the practical issues of tax deductible expenses and the taxation of barristers’ clerks.
Expenses
The expenses of a barrister’s chambers are dealt with separately in different sets. One method is for each individual barrister in a set to pay a ‘rent’ to the head of chambers to cover normal professional expenses such as the cost of providing a clerk or clerks, rent of the building (if not owned by the set), secretarial expenses, printing and stationery, postage, light and heat, computer charges, bank charges, telephone and other allowable practice expenses. Capital allowances on computers and other chambers’ capital expenditure will be claimed by the Head of Chambers, but the amounts received by him or her will be regarded as revenue income. The cost and running expenses of motor vehicles are likely to be claimed individually by each barrister.
If a fixed rent is paid by each barrister, there may be a taxation ‘add-back’ in his or her tax computation where the rent exceeds the individual barrister’s share of the allowable expenses of the chambers. Another method involves the pooling of costs, and the contribution by each barrister to a common fund. Revenue and capital costs may be treated differently, or in the same way. It is beyond the scope of this article to discuss this further. Other possibilities are the formation of a service company or treating the chambers as a
trade protection association.
We then consider individual expenses likely to be claimed by each barrister:
Travel expenses
It is clear that travel expenses between a barrister’s chambers and various courts, as well as travel between chambers and firms of solicitors and clients, are wholly allowable for tax. The decisions in Ricketts v Colquhoun 10 TC 118 and Newsom v Robertson 33 TC 452 prevent a barrister from claiming home to chambers travel expenses, even if he or she has a study or office at home. However, in such circumstances the barrister could claim for use of an office at home on the authority of Horton v Young 47 TC 60.
Clearly travel expenses are claimable if the barrister is based at home, and travels from there to courts, clients and firms of solicitors. In such a case the claim for use of home and other business expenses at home would also be valid. However these principles have become blurred because of the electronic age in which we now live. Some barristers spend much more time working at home than in chambers.
Travel from home to chambers would still appear to be non-deductible for tax purposes. It is arguable that, in cases where a barrister operates from ‘virtual’ chambers and only travels to the designated chambers office occasionally, then a claim for travel expenses could be allowable.
Barristers’ clothing
A claim for a barrister’s wig and gown is allowable for tax purposes. The well-known decision in Mallalieu v Drummond [1983] STC 665 prevents a claim by either a male of female barrister for a sober suit or similar clothing to be worn in court. However, the case gives the authority for a claim for such items on the ‘renewals’ basis.
Alternatively such expenses could be dealt with under the capital allowances legislation.
Professional books
Capital allowances have been deemed to be allowable on a barrister’s professional library, by virtue of Munby v Furlong 50 TC 491. This only applies to newly acquired books. A revenue deduction is available for the cost of regular law reports and items such as professional journals.
Subsistence
The decision in Caillebotte v Quinn [1975] STC 265 prevents a self-employed person from claiming normal subsistence expenses, except in clearly defined situations.
This is confirmed by the HMRC Business Income Manual at BIM 47705. However BIM 37670 gives some hope of relief where: ‘Extra costs are incurred wholly for business purposes where the business is by its nature itinerant or where occasional business journeys outside the normal pattern are made. Modest expenses incurred in these circumstances may be deducted from business profits.’ This relaxation of the statutory position is likely to be helpful to an individual barrister only in a few specialised situations. In such cases ‘modest expenses’ would presumably be equated with Civil Service rates for meals and subsistence.
Training costs
In most cases there will be no tax relief on the expense of becoming a barrister e.g. the fees for the Bar Professional Training Course. However if the prospective student was previously in employment, there is a possibility that the exemption for retraining costs provided by section 311, ITEPA2003 could be available, provided the strict conditions are met.
Employed or self-employed?
In cases where the senior clerk is still remunerated on the basis of barristers’ fees, then he or she will be self-employed, and will invoice each barrister accordingly. The status of self-employment was confirmed by the determination in McMenamin v Diggles [1983] STC 665.
In the case of larger chambers this may present a problem where there are several more junior clerks. In theory at least each of them would be employed by the senior clerk, who would have to pay them and operate the relevant PAYE records.
In other instance the senior clerk will be employed, and in theory will have a contract of employment with each member of the set. In practice, payment of salary and the PAYE scheme will be the responsibility of the Head of Chambers, and it is likely that these will be operated by the clerk. Secondary NI Contributions will be based on the total contributions made by each member of the chambers. The clerk will also be responsible for the employment of more junior clerks, including the contract of employment, payment of salary and PAYE records.
Other issues
Other issues such as the special rules when a barrister ceases to practise, Judicial appointments, other income of a barrister (including funded pupillages) and the treatment of VAT on barristers’ fees are beyond the scope of this article but are discussed fully in the well-known book by Keith Gordon on the Tax Treatment of Specialist Occupations.
HMRC interest
The current national economic situation means that HMRC have been tasked with collecting as much tax as possible. No government is prepared to increase the current rates of taxes. The result of this is that HMRC have adopted a compliance initiative formed to identify tax evaders and avoiders, but also to maximise the ‘take’ from existing ‘customers’.
Various trades, professions and individuals have been targeted by HMRC in recent years, and it is understood that the attention of HMRC has also turned to the tax affairs of barristers. Enquiries have obviously focused on the transactions where errors could have been made, namely the catch up charge on ceasing the cash basis and the full adoption of UITF 40. Inspection powers now available to the department mean that an HMRC Inspector can easily go back to year 1999, and even earlier years.
The writer acknowledges helpful comments made by Keith Gordon of Atlas Chambers, which have been incorporated into this article, an unabridged version of which was first published in Taxation magazine.
John Newth FCA FTII FIIT ATT
Expenses
The expenses of a barrister’s chambers are dealt with separately in different sets. One method is for each individual barrister in a set to pay a ‘rent’ to the head of chambers to cover normal professional expenses such as the cost of providing a clerk or clerks, rent of the building (if not owned by the set), secretarial expenses, printing and stationery, postage, light and heat, computer charges, bank charges, telephone and other allowable practice expenses. Capital allowances on computers and other chambers’ capital expenditure will be claimed by the Head of Chambers, but the amounts received by him or her will be regarded as revenue income. The cost and running expenses of motor vehicles are likely to be claimed individually by each barrister.
If a fixed rent is paid by each barrister, there may be a taxation ‘add-back’ in his or her tax computation where the rent exceeds the individual barrister’s share of the allowable expenses of the chambers. Another method involves the pooling of costs, and the contribution by each barrister to a common fund. Revenue and capital costs may be treated differently, or in the same way. It is beyond the scope of this article to discuss this further. Other possibilities are the formation of a service company or treating the chambers as a
trade protection association.
We then consider individual expenses likely to be claimed by each barrister:
Travel expenses
It is clear that travel expenses between a barrister’s chambers and various courts, as well as travel between chambers and firms of solicitors and clients, are wholly allowable for tax. The decisions in Ricketts v Colquhoun 10 TC 118 and Newsom v Robertson 33 TC 452 prevent a barrister from claiming home to chambers travel expenses, even if he or she has a study or office at home. However, in such circumstances the barrister could claim for use of an office at home on the authority of Horton v Young 47 TC 60.
Clearly travel expenses are claimable if the barrister is based at home, and travels from there to courts, clients and firms of solicitors. In such a case the claim for use of home and other business expenses at home would also be valid. However these principles have become blurred because of the electronic age in which we now live. Some barristers spend much more time working at home than in chambers.
Travel from home to chambers would still appear to be non-deductible for tax purposes. It is arguable that, in cases where a barrister operates from ‘virtual’ chambers and only travels to the designated chambers office occasionally, then a claim for travel expenses could be allowable.
Barristers’ clothing
A claim for a barrister’s wig and gown is allowable for tax purposes. The well-known decision in Mallalieu v Drummond [1983] STC 665 prevents a claim by either a male of female barrister for a sober suit or similar clothing to be worn in court. However, the case gives the authority for a claim for such items on the ‘renewals’ basis.
Alternatively such expenses could be dealt with under the capital allowances legislation.
Professional books
Capital allowances have been deemed to be allowable on a barrister’s professional library, by virtue of Munby v Furlong 50 TC 491. This only applies to newly acquired books. A revenue deduction is available for the cost of regular law reports and items such as professional journals.
Subsistence
The decision in Caillebotte v Quinn [1975] STC 265 prevents a self-employed person from claiming normal subsistence expenses, except in clearly defined situations.
This is confirmed by the HMRC Business Income Manual at BIM 47705. However BIM 37670 gives some hope of relief where: ‘Extra costs are incurred wholly for business purposes where the business is by its nature itinerant or where occasional business journeys outside the normal pattern are made. Modest expenses incurred in these circumstances may be deducted from business profits.’ This relaxation of the statutory position is likely to be helpful to an individual barrister only in a few specialised situations. In such cases ‘modest expenses’ would presumably be equated with Civil Service rates for meals and subsistence.
Training costs
In most cases there will be no tax relief on the expense of becoming a barrister e.g. the fees for the Bar Professional Training Course. However if the prospective student was previously in employment, there is a possibility that the exemption for retraining costs provided by section 311, ITEPA2003 could be available, provided the strict conditions are met.
Employed or self-employed?
In cases where the senior clerk is still remunerated on the basis of barristers’ fees, then he or she will be self-employed, and will invoice each barrister accordingly. The status of self-employment was confirmed by the determination in McMenamin v Diggles [1983] STC 665.
In the case of larger chambers this may present a problem where there are several more junior clerks. In theory at least each of them would be employed by the senior clerk, who would have to pay them and operate the relevant PAYE records.
In other instance the senior clerk will be employed, and in theory will have a contract of employment with each member of the set. In practice, payment of salary and the PAYE scheme will be the responsibility of the Head of Chambers, and it is likely that these will be operated by the clerk. Secondary NI Contributions will be based on the total contributions made by each member of the chambers. The clerk will also be responsible for the employment of more junior clerks, including the contract of employment, payment of salary and PAYE records.
Other issues
Other issues such as the special rules when a barrister ceases to practise, Judicial appointments, other income of a barrister (including funded pupillages) and the treatment of VAT on barristers’ fees are beyond the scope of this article but are discussed fully in the well-known book by Keith Gordon on the Tax Treatment of Specialist Occupations.
HMRC interest
The current national economic situation means that HMRC have been tasked with collecting as much tax as possible. No government is prepared to increase the current rates of taxes. The result of this is that HMRC have adopted a compliance initiative formed to identify tax evaders and avoiders, but also to maximise the ‘take’ from existing ‘customers’.
Various trades, professions and individuals have been targeted by HMRC in recent years, and it is understood that the attention of HMRC has also turned to the tax affairs of barristers. Enquiries have obviously focused on the transactions where errors could have been made, namely the catch up charge on ceasing the cash basis and the full adoption of UITF 40. Inspection powers now available to the department mean that an HMRC Inspector can easily go back to year 1999, and even earlier years.
The writer acknowledges helpful comments made by Keith Gordon of Atlas Chambers, which have been incorporated into this article, an unabridged version of which was first published in Taxation magazine.
John Newth FCA FTII FIIT ATT
John Newth concludes his review of the special tax provisions that affect practising barristers, focusing on the tax surrounding expenses and barristers’ clerks.
In Part 1 (Counsel June 2012), I dealt with the end of the cash basis and the consequences of having to include work in progress at full value after June 2005. The effect of these provisions on newly qualified barristers, and numerical examples showing how the statutory changes could work in practice, were also included. In this article I turn to the practical issues of tax deductible expenses and the taxation of barristers’ clerks.
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