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Income Tax (Earnings and Pensions) Act 2003

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.

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