Overview
1386.In this Part, in order to make each individual deduction provision as simple as possible, Chapter 1 states some general propositions about deductions. This saves those propositions having to be repeated in the individual provisions, so the deductions sections can then concentrate on the rules applying for the particular deduction in question.
1387.The provisions relating to deductions are then grouped in different chapters according to the type of deduction. So there are separate chapters for:
deductions for employee’s expenses (Chapter 2);
deductions from benefit code earnings for costs which would have been deductible if they had been paid by the employee (Chapter 3);
deductions for employee’s expenses covered by fixed allowances (Chapter 4);
deductions for earnings which represent expenses borne by the employer (Chapter 5); and
deductions from seafarers’ earnings (Chapter 6).
1388.Within Chapters 2 and 5, the provisions are then grouped according to the type of expense involved. For example, in Chapter 2, sections 337 to 342 deal with travel expenses.
1389.Within this Part, very many of the sections that allow deductions are drafted in accordance with the general formula that a deduction from earnings is allowed for an amount whose characteristics are then specified.
Chapter 1: Deductions allowed from earnings: general rules
Overview
1390.This is the first of six chapters dealing with deductions allowed in charging earnings to income tax.
1391.After the introductory section 327, this Chapter sets out some general propositions which are applicable to most of the deductions dealt with in the next five chapters. Those propositions relate to:
the income from which deductions may be made (section 328);
the general prohibition on deductions exceeding earnings (section 329);
the prevention of double deductions (section 330); and
the order in which deductions are to be made (section 331).
1392.This Chapter concludes with section 332, which lists “the deductibility provisions”.
Section 327: Deductions from earnings: general
1393.This section sets the scene. It gives information about the contents of this Part, and places this Part within a wider context.
1394.The section is new, although it draws on material contained in section 131(1) of ICTA.
1395.Subsection (1) provides the essential link between this Part of this Act and section 11(1), which is in Part 2. The subsection states that this Part provides for deductions that are allowed from the taxable earnings from an employment in a tax year for the purpose of calculating the “net taxable earnings” from the employment in the tax year for the purposes of Part 2 of this Act.
1396.Subsection (2) sets out how two key expressions are used in this Part. References to the earnings from which deductions are allowed are references to the taxable earnings mentioned in subsection (1), and references to the tax year are references to the tax year mentioned there.
1397.Subsection (3) states that the deductions for which this Part provides are those allowed under Chapters 2 to 6; and the contents of those Chapters are indicated.
1398.Subsection (4) lists other provisions, not in this Part, which make further provision about deductions; and subsection (5) lists other provisions, not in this Part, which make further provision about deductions from income including employment income.
Section 328: The income from which deductions may be made
1399.This section is the first of four which sets out a general proposition relating to deductions from earnings. It deals with the income from which deductions may be made.
1400.The most important single source for this section is section 198(1) of ICTA, which includes the proposition that an amount paid “out of the emoluments of the office or employment … may be deducted from the emoluments to be assessed”. This section also draws on a considerable number of other passages in Part 5 of ICTA and in section 50 of FA 1989.
1401.Subsection (1) sets out the general rule that deductions under this Part are allowed from any earnings from the employment in question, but not from earnings from any other employment.
1402.An example of how this rule operates in practice is given in Inland Revenue guidance in SE 31658:
An individual is employed as a teacher and separately employed as coach to a local youth football team. As coach she is paid £100 a year but she incurs expenses of £1,000 a year in travelling to away matches. She pays the expenses herself and is not reimbursed by her employer.
She is only allowed a deduction of £100 for her travelling expenses under section 198(1) of ICTA. She cannot claim a loss for the remaining £900 and nor can she deduct that amount from her teaching income.
1403.The general rule is subject to a number of qualifications. These are dealt with in the rest of this section.
1404.Subsection (2) deals with one case where the general rule is not wide enough. Expenses of a minister of religion (see section 351) are allowed from earnings from any employment as a minister of a religious denomination.
1405.Subsections (3) to (5) deal with cases where the general rule is too wide: for example there are some cases where the deductions are allowed only from earnings with particular characteristics – either relating to the source of the earnings or to the manner in which the earnings are charged to tax.
1406.Subsection (3) provides that deductions under section 368 are only allowed from earnings payable out of the public revenue.
1407.Subsections (4) and (5) deal with “deductions limited to specified earnings”: for, in the cases of some provisions, deductions are allowed from earnings from the employment which qualify as taxable earnings under certain of the charging provisions of Chapters 4 and 5 of Part 2, but not from other earnings from the employment.
Section 329: Deductions from earnings not to exceed earnings
1408.This section is the second of four which sets out a general proposition relating to deductions from earnings. It deals with the proposition that deductions from earnings may not exceed earnings.
1409.As in the case of section 328 the most important single source for this section is section 198(1) of ICTA, which allows a deduction for an amount if “the holder of an office or employment is obliged to incur and defray [that amount] out of the emoluments of the office or employment”. This section also draws on a considerable number of other passages in Part 5 of ICTA and in section 50 of FA 1989.
1410.Subsection (1) sets out the general rule that deductions may not exceed the earnings from which they are deductible. That general rule is then elaborated in subsections (2) to (4).
1411.Inland Revenue guidance makes it clear that the employee does not generally have to demonstrate that an expense has literally been paid out of the emoluments rather than out of some other source of money. It is generally sufficient that the emoluments charged to tax in a particular tax year are equal to, or greater than, the deductions to be made from those emoluments. As the Inland Revenue does not generally trace the source of funds used by the employee to pay expenses, the requirement that the employee must pay the expenses out of the emoluments of the employment is not stated in general terms in this Act. See Change 81 in Annex 1.
1412.Subsection (5) deals with a matter which follows on from the fact that this Act does not reproduce any general requirement that expenses must be paid out of the emoluments of the employment. This Act rewrites numerous provisions that refer to expenses that would be allowable if the employee paid them out of the emoluments of the employment. Those provisions (“the deductibility provisions”) are listed in section 332. Since the general requirement in subsection (1) that deductions from earnings are not to exceed earnings is assumed to be met in the deductibility provisions (because of the references in them to the employee being assumed to have paid the amounts or expenses out of emoluments), this subsection provides that this section is to be disregarded for the purposes of the deductibility provisions.
1413.Subsection (6) provides a signpost to section 380 of ICTA, a section drafted on the basis that there may be Schedule E losses which may be set against other income of the tax year, or carried back to earlier tax years.
Section 330: Prevention of double deductions
1414.This section is the third of four which sets out a general proposition relating to deductions from earnings. It deals with the prevention of double deductions.
1415.The proposition in this section is not articulated in general terms in ICTA, although it seems true as a matter of income tax law. There are statements of this proposition in particular contexts in sections 194(9), 195(12) and 198(3) of ICTA.
1416.Subsection (1) sets out the general rule: a deduction from earnings under this Part is not allowed more than once in respect of the same costs or expenses.
1417.Subsection (1) is expressed to apply to “costs and expenses”. These words are intended to cover all potential deductions under this Part, even though the amount of the deduction may not be computed by reference to an actual amount of expenditure – as is the case under Chapter 4 of this Part, which deals with fixed allowances for employee’s expenses.
1418.Subsection (2) deals with the case where a cost or expense qualifies both for an allowance under Chapter 4 of this Part and for a deduction under some other provision. In such a case only one of the deductions is allowed. This provision codifies Inland Revenue practice on these topics. See Change 82 in Annex 1.
Section 331: Order for making deductions
1419.This section is the last of four which sets out a general proposition relating to deductions from earnings. It deals with the order in which deductions may be made.
1420.Subsection (1) sets out the general rule that section 835 of ICTA, which provides for deductions to be allowed in the order which results in the greatest reduction of liability to income tax, applies in the present context.
1421.Subsection (2) qualifies the general rule. The subsection specifies two provisions which impose a requirement to consider deduction provisions in a particular order.
Section 332: Meaning of “the deductibility provisions”
1422.This Act rewrites numerous provisions that refer to amounts or expenses whose deduction would be allowed if the employee incurred and paid them out of the emoluments of the employment (or in some cases just incurred or just paid them). See Change 81 in Annex 1.
1423.The provisions of the Act that rewrite these provisions are listed in this section, where they are defined as “the deductibility provisions”.
1424.The requirement that amounts or expenses be incurred and paid out of emoluments of the employment is not, in general, being rewritten: so the deductibility provisions do not rewrite the words “out of the emoluments”. Instead, they refer to amounts or expenses that would be allowed as a deduction if the employee had incurred and paid them.
1425.Since the general requirement in section 329(1) that deductions from earnings are not to exceed earnings is assumed to be met in the deductibility provisions (because of the references in them to the employee being assumed to have paid the amounts or expenses out of emoluments), section 329(5) provides that section 329 is to be disregarded for the purposes of the deductibility provisions.
1426.In the case of the deduction under section 353, where the requirement for payment out of earnings has survived, it is provided that, for the purposes of the deductibility provisions, the expenses are to be assumed to have been paid out of the earnings in question. (See section 353(4).)
Chapter 2: Deductions for employee’s expenses
Overview
1427.This Chapter deals with the most familiar situation in which deductions from earnings are allowed – where the employee has paid an expense of the employment. The Chapter also deals with the situation where someone else (usually the employer) pays the expense on the employee’s behalf. The Chapter therefore deals with section 198 of ICTA, with the related provisions in Schedule 12A of that Act, and with a number of other provisions, such as sections 201, 201AA and 201A of ICTA, which allow deductions for particular expenses paid by the employee.
1428.The Chapter may be divided into the following components:
introductory provisions (sections 333 to 335);
the general rule governing the deduction of expenses (section 336);
further rules allowing the deduction of particular expenses, grouped according to the type of expense involved (sections 337 to 352);
special rules for earnings with a foreign element (sections 353 to 355); and
rules which prohibit or restrict deductions (sections 356 to 360).
Section 333: Scope of this Chapter: expenses paid by the employee
1429.This section sets out the distinguishing condition for the deductions allowed under this Chapter: the amount in question must have been paid by or on behalf of the employee.
1430.Subsection (1) sets out this basic proposition.
1431.The most important single source for this section is section 198(1) of ICTA, which allows a deduction for an amount where the holder of an office or employment is obliged to “incur and defray” that amount. There are also a number of other provisions in Part 5 of ICTA which have similar wording.
1432.There is, however, another point that arises in relation to this part of section 198(1) of ICTA and other corresponding provisions. A deduction may be allowed where the employee has incurred the expense but the actual liability is met by someone else, usually the employer. Where the employee’s pecuniary liability is met in this way it is an emolument. It is taxed under paragraph 1 of section 19(1) of ICTA. As the expense is met in a way that constitutes emoluments, it is accepted that it has been defrayed out of those emoluments. The employee, accordingly, is allowed a deduction if the liability met comes within the wording of section 198(1) of ICTA or some other corresponding provision. This, in practice, is how those provisions are operated. Subsection (1)(b) of this section therefore provides for a deduction to be allowed for such an amount if that amount is paid on the employee’s behalf by someone else and is included in the earnings. See Note 36(A) in Annex 2.
1433.The source legislation does not state explicitly that a deduction is allowed where the employee incurs the expense but the liability is met by someone else. Subsection (2) makes the position clearer by providing that the employee is treated as paying the expense where the actual liability is met by someone else and constitutes earnings of the employee.
1434.To be allowed a deduction under this Chapter, an employee must satisfy subsection (1), read, if necessary, with subsection (2), although there are some provisions where it is perhaps unlikely that subsection (2) will be in point. The inclusion of these propositions here means that it becomes unnecessary to say something to the same effect in each of the individual deduction provisions in this Chapter.
1435.Subsection (3) deals with the two exceptions to subsection (1). In the case of these two exceptions, subsection (2) is also disapplied.
1436.Subsection (4) consists of a signpost to the following Chapter. That Chapter deals with deductions from benefits code earnings for costs that would have been deductible if the employee had paid them. It therefore covers cases where an expense is met by the employer in the form of a taxable benefit.
Section 334: Effect of reimbursement etc.
1437.This section contains provisions dealing with the effect of reimbursement.
1438.Under the source legislation, a reimbursed amount is dealt with for income tax purposes in either of two ways:
if the reimbursed amount constitutes part of the earnings from the employment, the deduction is allowed in full; or
if the reimbursed amount does not constitute part of the earnings from the employment, the deduction of the expense is not allowed to the extent that reimbursement is made. The speeches of Lord Guest and Lord Pearce in Pook (HM Inspector of Taxes) v Owen (1969) 45 TC 571 envisage that a reimbursed amount may be dealt with in this way.
1439.Against this background, this section has been included in this Act with the object of making explicit provision for cases where an amount is reimbursed. This section is not derived directly from the source legislation, but it reflects Inland Revenue practice in cases where amounts deductible for income tax purposes are reimbursed. See Note 36(B) in Annex 2.
1440.This section also includes wording to ensure that the provisions of this Chapter apply where a payment is made to the employee in respect of the expenses in question, and that payment is included in the employee’s earnings. This wording guards against the argument that, in such a case, it is the person making the payment to the employee who pays the amount in question, and not the employee.
1441.Subsection (3) provides that this section does not apply to expenses allowed under section 351 (expenses of ministers of religion).
1442.Subsection (4) provides that this section is disregarded for the purposes of the deductibility provisions (as defined in section 332).
Section 335: Application of deductions provisions: “earnings charged on receipt” and “earnings charged on remittance”
1443.This section provides that the availability of certain deductions under this Chapter depends on whether or not the earnings are “earnings charged on receipt” or “earnings charged on remittance”.
1444.The section is new, but it draws on material in section 198(2) of ICTA.
1445.The expressions “earnings charged on receipt” and “earnings charged on remittance” are defined in subsection (4) for the purposes of this Part of this Act. The ambit of the expression “earnings charged on receipt” is the same as that of Cases I and II of Schedule E in paragraph 1 of section 19(1) of ICTA; and the ambit of the expression “earnings charged on remittance” is the same as that of Case III of Schedule E in section 19(1) of that Act.
Section 336: Deductions for expenses: the general rule
1446.This section states the general rule relating to deductions allowed from earnings.
1447.The section derives from section 198(1)(b) of ICTA. This provision has been the subject of much litigation.
1448.Subsection (1) states the general rule: a deduction from earnings is allowed for an amount if the employee is obliged to incur and pay it as holder of the employment, and the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
1449.Subsection (2), which is new, provides that the following sections in this Chapter contain additional rules allowing deductions for particular kinds of expenses, and rules preventing particular kinds of expenses from being deductible. This subsection, accordingly, emphasises the fact that deductions under the later sections in this Chapter do not depend on this section being satisfied first.
1450.Subsection (3) provides that no deduction is allowed under this section for an amount that is deductible under sections 337 to 342 (travel expenses).
Section 337: Travel in performance of duties
1451.This section allows a deduction from earnings for travel expenses if the expenses are necessarily incurred on travelling in the performance of the duties of the employment.
1452.The section is the first of two dealing with the proposition, contained in section 198(1)(a) of ICTA, that a deduction is allowed for “qualifying travelling expenses”. This section deals with the part of that definition in section 198(1A)(a) of ICTA.
1453.Although the label “qualifying travel expenses” appears in section 198(1)(a) of ICTA, that label is used only at the beginning of section 198(1A) of that Act. The label is not used in this Act.
1454.Subsection (1) provides that a deduction is allowed from earnings for the travel expenses. In subsection (1)(b), the word “incurred” has replaced the word “expended”; but the practical application of this section should be precisely the same as that of the legislation it replaces: subsection (1)(a) provides that the travel expenses must be both incurred and paid.
1455.Subsection (2) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.
Section 338: Travel for necessary attendance
1456.This section allows a deduction from earnings for travel expenses if the expenses are attributable to the employee’s necessary attendance at any place in the performance of the duties of the employment. However, the deduction allowed by this section is not available for the expenses of “ordinary commuting” or “private travel”.
1457.The section is the second of two dealing with the proposition that a deduction is allowed for qualifying travelling expenses. This section deals with the part of that definition in section 198(1A)(b) of ICTA. That provision mentions “ordinary commuting” and “private travel” in section 198(1A)(b)(ii) but those expressions are only defined in paragraph 2 of Schedule 12A to that Act. Paragraph 3 of that Schedule contains a gloss on paragraph 2 and this section also deals with that gloss.
1458.This section derives from section 198(1)(a) and (1A)(b) of ICTA and from paragraphs 2 and 3 of Schedule 12A to that Act. The statutory material has been reorganised so that the definitions of “ordinary commuting” and “private travel” are placed near the propositions to which they apply; and the gloss upon the definitions has been incorporated in the subsections setting out the effect of “ordinary commuting” and “private travel”.
1459.Subsection (6) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.
Section 339: Meaning of “workplace” and “permanent workplace”
1460.This section defines the terms “workplace” and “permanent workplace”, which are used in the definitions of “ordinary commuting” and “private travel” in section 338.
1461.The section derives from paragraphs 2(3) and 4 to 7 of Schedule 12A to ICTA.
Section 340: Travel between group employments
1462.This section allows a deduction from earnings for travel expenses where an employee, who has employments with more than one company in the same group, travels from a place of employment with one group company to another place of employment with another group company.
1463.The section derives from section 198(1B) of ICTA, which provides that the travel expenses are treated as necessarily expended in the performance of the duties to be performed at the destination.
1464.Subsections (2) to (5) set out all the conditions that need to be met for the deduction to be allowed. The condition that it is the holder of the employment who is obliged to incur the expenses has not been included, because the Inland Revenue does not rely on this condition before the deduction is allowed. See Change 83 in Annex 1.
1465.Subsection (6) defines the term “group” for the purposes of this section. The definition is more concise than in the legislation from which this subsection derives.
1466.Subsection (7) does not set out the general proposition, to be found in the source legislation, that the travel expenses are necessarily expended in the performance of the duties to be performed at the destination. Instead, the operation of the provision has been confined to the two sections (mentioned in this subsection) where this proposition may have an impact.
1467.Subsection (8) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.
Section 341: Travel at start or finish of overseas employment
1468.This section allows a deduction from earnings for starting travelling expenses and finishing travelling expenses if the duties of the employment are performed wholly outside the United Kingdom.
1469.The section derives from section 193(2) and (3) of ICTA.
1470.Section 193(3) begins with the words “For the purposes of section 198(1)”. This section sets out all the conditions that have to be met in each case, as opposed to referring to section 336, the successor provision to section 198(1).
1471.Subsections (2) to (4), however, do not reproduce the condition from section 198(1) that the holder of the employment is obliged to incur and defray the expenses, because the Inland Revenue does not rely on this condition before allowing the deduction from earnings. See Change 83 in Annex 1.
1472.Subsection (4) is one of the provisions that make use of the new term “foreign employer”, defined in section 721 for the purposes of this Act as a whole.
1473.Subsections (6) and (7) derive from section 132(2) of ICTA. These subsections ensure that a deduction under this section is still available if duties of the employment are performed in the United Kingdom which are merely incidental to the duties of the employment performed outside the United Kingdom. See also Change 101(B) in Annex 1.
1474.Subsection (8) defines the new terms “starting travel expenses” and “finishing travel expenses”, which describe travel to take up an overseas employment and travel home after it has finished. This subsection also extends the meaning of the term “employee” to include a person who is to be, or has ceased to be, an employee.
1475.Subsection (9) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.
Section 342: Travel between employments where duties performed abroad
1476.This section allows a deduction from earnings for travel expenses where an employee, who has performed duties of one employment at the place of departure, travels to perform duties of another employment at the destination, and the place of departure or the destination, or both, are outside the United Kingdom.
1477.The section derives from section 193(5) and (6) of ICTA.
1478.Section 193(6) begins with the words “For the purposes of section 198(1)”. This section sets out all the conditions that have to be met in each case, as opposed to referring to section 336, the successor provision to section 198(1).
1479.Subsections (2) to (7), however, do not reproduce the condition from section 198(1) that the holder of the employment is obliged to incur and defray the expenses, because the Inland Revenue does not rely on this condition before the deduction is allowed. See Change 83 in Annex 1.
1480.Subsection (7) is one of the provisions that make use of the new term “foreign employer”, defined for the purposes of this Act as a whole in section 721.
1481.Subsection (9) provides that this section needs to be read with section 359, which prohibits a deduction if a mileage allowance is paid or if mileage allowance relief is available.
