The Briefcase #60: 6 Very Difficult Questions Tax Tribunals Have Been Faced With

Tax law covers employment, property, investment, business expenses, marriage, divorce, and basically everything you could ever hope to do, or hope not to do. It’s a wide remit, but it’s still possible to be sneaky with it.

Sooner or later, even the most carefully drafted tax legislation encounters a situation nobody could have possibly envisioned when it was written. If it’s an especially tricky one, it’ll go to a tax tribunal, where a load of people, sometimes in wigs, have to work incredibly hard – often to the detriment of their personal lives – on the very serious case of whether a Jaffa Cake is a cake or a biscuit.

So, let’s take a trip around the world and see what tax authorities have actually been arguing about.

What is art?

We’ll begin in Ireland, where the Tax Appeals Commission recently faced a question philosophers have struggled with forever – what is art? More specifically, is it a metal bathtub covered in moss and buttermilk? You’d imagine if the greatest minds of antiquity couldn’t find an adequate answer that a group of men and women whose experiences of art are limited to dissuading their children from doing a humanities degree might consider it beyond their remit, but never underestimate the hubris of the taxman.

Irish artist Muireann Nic Cába created Sound Bath, an installation involving a metal bathtub partially covered with sphagnum moss. The moss was mixed with buttermilk to create what was described as a “moss milkshake”, then applied to the bath and encouraged to grow. Visitors encountering the work at an arts festival were invited to sit inside it and experience the surroundings.

This became important because Ireland has an artists’ exemption that can exempt certain qualifying artistic income from income tax, subject to limits. Nic Cába applied, but Revenue said no.

Revenue argued that because there was a cushion, and people could sit in it, that the moss-covered bath was too useful to be art. Thankfully, the Tax Appeals Commission disagreed, deciding that Sound Bath was a unique sculpture with artistic merit and qualified for the exemption, and actually wasn’t really that useful in the first place.

Is my moat subject to tax?

Next to Britain, where we’ve found a thrilling new way of making stamp duty land tax more byzantine. Charles Brzezicki bought a six-acre property containing a six-bedroom house. About two acres consisted of an island separated from the rest of the grounds by a six-foot-wide, man-made stream. He subsequently used the stream as a spawning ground for wild trout and charged people to fish there.

So, was the entire property residential, or did the island and its commercial fishing use mean it was mixed-use? Brzezicki initially paid SDLT on the basis that the property was residential, but later amended the return to claim mixed-use treatment.

The dispute eventually reached the Upper Tribunal, which sided with HMRC. It found that the island and stream formed part of the grounds of the dwelling; subsequent commercial use didn’t change what the land was at the relevant time.

If you’re looking for something low-effort to make a bit of extra cash, you could maybe find something a little simpler than “man-made trout moat”.

Have I found treasure?

Across the Atlantic, the US Tax Court recently had means to ponder a treasure trove. In Feige v Commissioner, Corri Feige had been awarded 400,000 shares by her employer, with 100,000 due to vest each year. There was one important condition – she had to still be employed at the end of the year.

Feige left the company in November 2014. So when another 100,000 shares appeared in her brokerage account the following January, she believed they had been transferred by mistake. She tried to contact her former employer, but the shares remained in her account – and she later received a W-2 showing their value as compensation.

This led to an unusual argument. Feige claimed the shares were comparable to a treasure trove – meaning property she had unexpectedly acquired but which her former employer could potentially reclaim. She therefore argued that she shouldn’t be taxed until her ownership became undisputed.

There is actually US tax precedent concerning treasure troves. One famous case involved people discovering old cash inside a second-hand piano. Unfortunately for Feige, receiving 100,000 shares from your former employer isn’t quite the same as digging at a big X.

The Tax Court rejected the comparison and treated the shares as taxable compensation. Still, it’s interesting that American tax law is prepared for the possibility of finding treasure. Does it constitute the American dream?

Is my bathroom an office?

Working from home has forced tax authorities around the world to consider where the workplace ends and the home begins. Recently, Australia established that the bathroom is probably more home than work, even if it sometimes doesn’t feel like it.

In Shugai and Commissioner of Taxation, a taxpayer claimed home-office expenses based partly on the proposition that around 31% of his split-level family home was devoted to income-producing activities. Included within that calculation was his office, a storage room, a kitchenette and a bathroom.

Unfortunately, the Administrative Appeals Tribunal was unconvinced. It considered the suggestion that almost 31% of the home constituted a home office “manifestly implausible”, observing that the kitchen and bathroom had the characteristics one might ordinarily associate with the private and domestic parts of a house, which might seem completely bonkers, but actually loads of people agreed.

There were other ambitious numbers involved, too. The taxpayer had claimed 100% of internet expenses, despite living with four other family members, along with 50% of gas and 40% of electricity. The Tribunal didn’t seem to believe the taxpayer was as much of a workaholic as he was arguing.

Can my country pay for my divorce?

From Australia, we sail the high seas to New Zealand, where a taxpayer faced an expensive divorce and wondered whether the tax system might consider donating to his costs.

In A v CIR, Mr A sought a deduction of NZ$18,069.31 for interest he was required to pay his ex-wife under a relationship property agreement. There was more to the argument than simply writing “divorce – business expense” on a tax return. The legal question concerned whether there was a sufficient connection between the interest expenditure and the taxpayer’s assessable income.

The Taxation and Charities Review Authority decided there wasn’t and disallowed the deduction. All too often, the kids pay the most in a divorce, so it was interesting there was once the possibility the state of New Zealand might lose the most.

Is my dog my colleague?

Finally, back to Britain. Tyler Security – which is the name of a company, not an example of nominative determinism – supplied security “dog teams” to clients including Wembley, Wimbledon and Premier League football clubs. Each team consisted of a trained security dog and its handler.

The tax dispute concerned whether agency legislation applied to the handlers and, consequently, whether PAYE was due. But one of the company’s arguments created a much more entertaining question – who was actually providing the security service?

Tyler Security argued, in part, that it was the dog, which is one of those awful reminders that some dogs are cursed to have jobs. However, the tribunal concluded that the human handler’s presence, judgement and ability to interpret and communicate the dog’s reactions were essential. The dog was effectively specialist equipment being operated by trained personnel, and the handler was personally providing the service, which feels a bit dehumanising. Or dedogising?

HMRC’s PAYE determination, ultimately reduced to £88,503.70, therefore stood. But the question remains – how many legs did it stand on? Four, or was it on its hind legs?

🧠 Final thoughts

These cases sound ridiculous when reduced to a single question, but the disputes themselves are taken incredibly seriously, and often revolve around a life-changing amount of money. The law professional’s expertise often revolves around their mindnumbing ability to take a hypothetical to its tedious endpoint – treating questions like “is this murder or manslaughter?” in exactly the same way as “can a dog do a job?”

So, if you’re ever wondering if you can surreptitiously slip something by the taxman, maybe consider doing something a bit easier, like chopping down a tree with your bare hands, or eating France.