I have often been struck by the difficulties (or absurdities) surrounding the deduction of expenses from employment income. Well, there is some good news.
An employee is allowed a tax deduction by ITEPA 2003 s 336 for an expense if:
‘(a) the employee is obliged to incur and pay it as a holder of the employment, and
(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.’
The first condition is that the expense must be necessary by reason of the employment, and not merely necessary for the particular employee. So every employee must be obliged to incur the expenditure to do his job, for this limb to be satisfied.
The second condition is more demanding. The expense must be incurred wholly, exclusively and necessarily in the performance of the duties. The House of Lords in Fitzpatrick v IRC 66 TC 407 explained that doing something in preparation for the work is not enough; it has to be ‘in the performance of the duties’.
It is the act of incurring the expense (and paying the money) which must be done in the performance of the duties of the employment. When the taxpayer spent the money, was he actually performing the duties of his employment? Almost certainly not – unless his job was perhaps to observe the behaviour of shopkeepers at the point of sale of their product. If he was buying a pen and paper for his work, no deal; that would merely be a preparatory act.
This just goes to demonstrate what a strict test is imposed by the legislation. The fact that the test is virtually impossible to satisfy has not (unfortunately) caused any judicial flexibility in its interpretation.
Section 337 specifically allows a deduction for travel expenses where:
the employee is obliged to incur and pay the expenses as holder of the employment; and
the expenses are necessarily incurred on travelling in the performance of the duties of the employment.
The conditions here are not quite as strict. If you are an employee and have to travel to meet a customer, that would seem to be within the scope of s 337 – although in nearly every case the employer would pick up the tab. What this really means is that the employer would reimburse you (and it would go on your P11D and be taxable) but you can deduct the cost, leaving you in the same position.
I am mentioning all this because of a recent case involving British Airways where pilots were provided with accommodation at the airport for mandatory rest between flights. The cost of the accommodation is a taxable benefit and the issue was whether they were entitled to a deduction under s 337: HMRC v British Airways plc [2026] UKUT 366 (TCC). (To be more precise, it was all about liability to NIC, but that did not apply if s 337 was satisfied.)
Both the FTT and the Upper Tribunal held that while the pilots were resting at the accommodation they were travelling in the course of performing their duties and that the expenses involved were necessarily incurred.
I would not want to disagree with this conclusion, but I am puzzled how it can be said that the employees satisfied s 337(1) – the bit where it says that the employee is ‘obliged to incur and pay’ the expenses. The employees did not incur the expenses, nor did they pay them; they were incurred and paid by the airline. However, the decision (which is binding) is a much more sensible answer.
I have often been struck by the difficulties (or absurdities) surrounding the deduction of expenses from employment income. Well, there is some good news.
An employee is allowed a tax deduction by ITEPA 2003 s 336 for an expense if:
‘(a) the employee is obliged to incur and pay it as a holder of the employment, and
(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.’
The first condition is that the expense must be necessary by reason of the employment, and not merely necessary for the particular employee. So every employee must be obliged to incur the expenditure to do his job, for this limb to be satisfied.
The second condition is more demanding. The expense must be incurred wholly, exclusively and necessarily in the performance of the duties. The House of Lords in Fitzpatrick v IRC 66 TC 407 explained that doing something in preparation for the work is not enough; it has to be ‘in the performance of the duties’.
It is the act of incurring the expense (and paying the money) which must be done in the performance of the duties of the employment. When the taxpayer spent the money, was he actually performing the duties of his employment? Almost certainly not – unless his job was perhaps to observe the behaviour of shopkeepers at the point of sale of their product. If he was buying a pen and paper for his work, no deal; that would merely be a preparatory act.
This just goes to demonstrate what a strict test is imposed by the legislation. The fact that the test is virtually impossible to satisfy has not (unfortunately) caused any judicial flexibility in its interpretation.
Section 337 specifically allows a deduction for travel expenses where:
the employee is obliged to incur and pay the expenses as holder of the employment; and
the expenses are necessarily incurred on travelling in the performance of the duties of the employment.
The conditions here are not quite as strict. If you are an employee and have to travel to meet a customer, that would seem to be within the scope of s 337 – although in nearly every case the employer would pick up the tab. What this really means is that the employer would reimburse you (and it would go on your P11D and be taxable) but you can deduct the cost, leaving you in the same position.
I am mentioning all this because of a recent case involving British Airways where pilots were provided with accommodation at the airport for mandatory rest between flights. The cost of the accommodation is a taxable benefit and the issue was whether they were entitled to a deduction under s 337: HMRC v British Airways plc [2026] UKUT 366 (TCC). (To be more precise, it was all about liability to NIC, but that did not apply if s 337 was satisfied.)
Both the FTT and the Upper Tribunal held that while the pilots were resting at the accommodation they were travelling in the course of performing their duties and that the expenses involved were necessarily incurred.
I would not want to disagree with this conclusion, but I am puzzled how it can be said that the employees satisfied s 337(1) – the bit where it says that the employee is ‘obliged to incur and pay’ the expenses. The employees did not incur the expenses, nor did they pay them; they were incurred and paid by the airline. However, the decision (which is binding) is a much more sensible answer.
