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Income Tax (Earnings and Pensions) Act 2003

Example

1537.Suppose that F, a Frenchman, is resident and ordinarily resident in France. He performs most of the duties of his employment in France where he receives the earnings for those duties. F does not remit any of those earnings to the United Kingdom, so they are not chargeable to income tax in the United Kingdom. As the holder of his employment, F is also obliged, while in France, to incur expenditure wholly, exclusively and necessarily in the performance of his duties there. However, F also performs a minority of the duties of his employment in the United Kingdom where he receives earnings for these other duties. These earnings are chargeable to income tax in the United Kingdom (see section 27). This section prohibits F from deducting the expenditure incurred in France from the income chargeable to tax in the United Kingdom.

1538.Subsection (2) applies if the earnings from an employment for a tax year include both earnings charged on remittance under section 26 and other earnings. The subsection prohibits a deduction under section 353 from the earnings charged on remittance if the expenses in question relate to the other earnings.

1539.Subsection (3) provides that this section is to be disregarded for the purposes of the deductibility provisions. See Note 37 in Annex 2.

Section 355: Deduction for corresponding payments by non-domiciled employees with foreign employers

1540.This section provides for a non-domiciled employee with a foreign employer to claim a deduction if certain conditions are met.

1541.This section derives from section 192(1) and (3) of ICTA.

1542.Subsections (2) to (5) sets out the conditions that must be met:

  • The employee must not be domiciled in the United Kingdom;

  • The employment must be with a foreign employer (a term defined in section 721(1));

  • The employee must have made a payment out of earnings from the employment; and

  • The payment did not reduce the employee’s liability to United Kingdom income tax, but was made in circumstances corresponding to those in which it would do so.

1543.Subsection (6) provides for the deduction to be allowed.

1544.Section 192(3) of ICTA provides for a successful claim to be allowed “as a deduction in computing the amount of the emoluments”; but this section provides for the claim to be allowed “as a deduction under this Chapter”. See Change 93 in Annex 1.

Section 356: Disallowance of business entertainment and gifts expenses

1545.This section prevents a deduction from earnings of expenses incurred in providing entertainment or a gift in connection with the employer’s trade, business, profession or vocation. This general prohibition is subject to the exceptions in sections 357 and 358.

1546.This section derives from section 577(1)(b), (5), (7) and (8) of ICTA and contains new drafting material.

1547.Subsection (1) contains the general prohibition on deducting expenses incurred in providing entertainment or a gift.

1548.This section makes it clear that the trade, business, profession or vocation to which the business entertainment expenses relate is the trade etc of the employer. See Change 94 in Annex 1.

1549.Subsection (2) refers to certain exceptions from the general prohibition in subsection (1).

1550.Subsection (3) extends the meaning of “entertainment” and brings incidental expenses within the scope of the section.

Section 357: Business entertainment and gifts: exception where employer’s expenses disallowed

1551.This section contains an exception to the general prohibition on deducting business entertainment and gifts expenses in section 356. It derives from section 577(1)(a) and (3) of ICTA and contains new drafting material.

1552.Subsection (1) disapplies the prohibition on deducting entertaining and gifts expenditure in section 356 where certain conditions are met and refers to further alternative conditions in subsections (2), (3) and (4).

1553.Subsection (2) requires that the deduction of the expense must fall to be disallowed in calculating the employer’s profits because of section 577 of ICTA where the employer is carrying on a trade, profession or vocation. In practice, this condition is treated as met where the expense would have been disallowed apart from any exemption in section 505(1)(e) of ICTA (exemption from tax under Schedule D in respect of the profits of any trade carried on by a charity where the profits are applied solely to the purposes of the charity etc.) or because of another relief applying to the profits of the employer. Subsection (2) spells out this treatment.

1554.Subsection (3) contains an alternative requirement that the expense must fall to be disallowed in calculating the employer’s expenses of management because of section 577 of ICTA. Again, it is made clear that the fact the disallowance does not operate because a relief applies is ignored.

1555.Subsection (4) contains the other alternative requirement that the expense would fall to be disallowed in calculating the employer’s “relevant shipping profits” apart from the making by the employer of a tonnage tax election. See Change 95 in Annex 1.

1556.Subsection (5) contains cross-references to Schedule 22 to FA 2000 to explain the terms used in subsection (4) relating to tonnage tax.

1557.The reference in section 577(3)(b) of ICTA to “in whole or in part” has been omitted. See Note 38 in Annex 2.

Section 358: Business entertainment and gifts: other exceptions

1558.This section contains the other exceptions from the general prohibition on deducting business entertaining and gifts expenses in section 356. It derives from section 577(5), (7)(c) and (8) of ICTA and contains new drafting material.

1559.Subsection (1) provides that the general prohibition on deducting expenses in section 356 does not apply, with some exceptions, if the sums are incurred in providing entertainment or gifts for the employer’s employees. But the prohibition in section 356 does still apply in the circumstances set out in paragraphs (a) and (b) of subsection (1) of section 358.

1560.Subsection (2) treats directors and persons engaged in the management of a company as employed by it for the purpose of this section.

1561.Subsection (3) provides that the general prohibition on deducting entertaining and gifts expenses in section 356 does not apply, with some exceptions, if the sums relate to the provision of a gift which incorporates a conspicuous advertisement for the employer. But the prohibition in section 356 does still apply in the circumstances set out in subsection (3)(a) or (b) of section 358.

1562.The subsection also provides that where the employer is a company, the general prohibition does not apply, with some exceptions, if the expenses are incurred in providing a gift which incorporates a conspicuous advertisement for another company which belongs to the same group as the employer. See Change 96 in Annex 1. This exception will not apply, however, in the circumstances set out in subsection (3)(a) or (b) of this section.

1563.This subsection also removes any doubt there might be about whether an employee is excepted from the prohibition in section 356 where the terms of the exception are met. See Change 96 in Annex 1.

1564.The word “donor” which appears towards the end of the introduction to section 577(8) of ICTA has been changed to “employer” in subsection (3) of section 358. See Change 96 in Annex 1.

1565.The £50 limit in subsection (3)(b) of this section is fixed at that amount by the section. However, section 716(2)(h) of this Act provides that the £50 limit may be increased by an order made by the Treasury. See Change 96 in Annex 1.

1566.Subsection (4) defines “group” for the purposes of subsection (3) of this section.

Section 359: Disallowance of travel expenses: mileage allowances and reliefs

1567.This section prohibits an employee from obtaining a deduction under the travel deduction provisions (defined as sections 337 to 342, 351, 370, 371, 373 and 374) if mileage allowance payments are made to the employee or mileage allowance relief is available. The section is necessary to establish the order in which the relevant provisions are to be applied and to ensure that there is no double relief.

1568.The section derives from section 198(5) of ICTA, added by Schedule 12, Part 2, paragraph 6 to FA 2001 (in so far as this section relates to the travel deductions provisions other than section 351); and from section 332(3A) and (3B) of ICTA, added by Schedule 12, Part 2, paragraph 10 to FA 2001 (in so far as this section relates to section 351).

1569.Subsection (4) contains the definitions of “mileage allowance payments” and “the travel deductions provisions” and contains signposts to the definitions of “company vehicle” and “mileage allowance payments”. Mileage allowance relief is dealt with in section 231.

Section 360: Disallowance of certain accommodation expenses of MPs and other representatives

1570.This section prevents MPs and other representatives from obtaining a deduction from earnings for residential or overnight accommodation.

1571.The section derives from section 198(4) of ICTA.

1572.Section 198(4) is the counterpart to provisions contained in sections 200 and 200ZA of ICTA, from which sections 292 and 293 derive. Those sections provide that allowances for residential or overnight accommodation are exempt from income tax: and this present section accordingly provides that no deduction is allowed for the accommodation expenses in respect of which the allowances are paid.

1573.Subsection (1) provides that no deduction from earnings is allowed “under this Chapter”, and may, accordingly, be contrasted with section 198(4) of ICTA, which provided that no deductions should be made “under this section”. See Change 97 in Annex 1.

Chapter 3: Deductions from benefits code earnings
Overview

1574.The sections in this Chapter allow deductions where goods or services are provided which are within the scope of the benefits code and deductions would have been allowed if the goods or services had been paid for by the employee. The sections derive from sections 141(3), 142(2), 145(3) and 156(8) of ICTA.

1575.All the sections in the Chapter refer to deductions under the whole of Chapter 2 and Chapter 5 of this Part instead of restricting them to the rewritten versions of the provisions referred to in sections 141(3), 142(2), 145(3) and 156(8) of ICTA. See Change 99 in Annex 1.

Section 361: Scope of this Chapter: cost of benefits deductible as if paid by employee

1576.This section sets out the general proposition for a deduction to be allowed under this Chapter. A person’s earnings must include an amount treated as earnings under the relevant parts of the benefits code and a deduction must have been allowable if the employee had paid the cost of the goods or services. The sections in this Chapter are a change in approach to provisions from which they are derived. The changes in sections 362, 363, 364 and 365 are explained in detail in Changes 98 and 99 in Annex 1.

Section 362: Deductions where non-cash voucher provided

1577.This section applies where goods or services are obtained by an employee in exchange for a non-cash voucher for which an amount is treated as earnings by virtue of section 87(1). It derives from section 141(3) of ICTA. If, had the goods or services been provided by the employee, a deduction would be allowable by the provisions of Chapter 2 or 5 of this Part a deduction is allowable by virtue of this section.

1578.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1579.Subsection (2) quantifies the amount of the deduction. A limit is placed on the amount of the deduction allowed rather than providing the deduction is only to be set against the amount treated as earnings.

Section 363: Deductions where credit-token provided

1580.This section applies where goods or services are provided using a credit-token. A deduction may be allowed where the earnings include an amount treated as earnings under section 94(1) and the token is used to obtain goods or services. If the employee would have been allowed a deduction under Chapter 2 or Chapter 5 of this Part if he had paid for the goods or services, a deduction is allowed by this section.

1581.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1582.Subsection (2) quantifies the amount of the deduction, with the same limit as described for section 362.

1583.The section derives from section 142(2) of ICTA.

Section 364: Deductions where living accommodation provided

1584.This section applies where the benefit provided is living accommodation. A deduction may be allowed where the earnings include an amount treated as earnings under Chapter 5 of Part 3. If the employee would have been allowed a deduction under Chapter 2 or Chapter 5 of this Part if he had paid for the accommodation, a deduction is allowed under this section. It derives from section 145(3) and 146(9) of ICTA.

1585.A limit is placed on the deduction to be made. The deduction will be calculated on the basis that the amount paid by the employee for the accommodation is equal to the amount treated as earnings in respect of that accommodation.

1586.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1587.Subsection (2) quantifies the amount of the deduction.

Section 365: Deductions where employment-related benefit provided

1588.This section applies where an unspecified benefit is provided. A deduction may be due where the earnings include an amount treated as earnings under Chapter 10 of Part 3 of this Act in respect of a benefit. If the employee would have been allowed a deduction under Chapter 2 or Chapter 5 of this Part if he had paid for the cost of the benefit, a deduction is allowed under this section. It derives from section 156(8) of ICTA.

1589.Subsection (1) sets out the conditions which must apply if a deduction from earnings is to be allowed.

1590.Subsection (2) quantifies the amount of the deduction with the same limit as described for section 362.

1591.Subsection (3) contains an explanation of the “cost of the benefit”.

Chapter 4: Fixed allowances for employee’s expenses
Overview

1592.This Chapter contains provisions that allow deductions from an employee’s earnings for amounts fixed by the Treasury.

Section 366: Scope of this Chapter: amounts fixed by Treasury

1593.This section sets out the scope of the Chapter – to allow deductions from earnings for a sum fixed by the Treasury by reference to the employee’s employment.

Section 367: Fixed sum deductions for repairing and maintaining work equipment

1594.This section allows a deduction from the earnings of certain classes of employees for a sum fixed by the Treasury.

1595.It derives from ESC A1. See Change 100 in Annex 1.

1596.Subsection (1) allows a deduction from the earnings of an employee for a sum fixed by the Treasury as representing the average annual expense in respect of the repair and maintenance of work equipment incurred by employees of the class to which the employee belongs.

1597.Subsection (2) sets out the terms under which the Treasury may fix a sum for a class of employees.

1598.Subsection (3) prevents the allowance of the fixed-sum deduction if the expense in respect of which the sum is fixed is paid or reimbursed by the employer or would be if requested.

1599.Subsection (4) provides that where the employer meets part of the expenses (or would do if so requested) in respect of which the fixed-sum deduction is set, the deduction is reduced by that amount.

1600.Subsection (5) defines “work equipment” for subsections (1) and (2).

1601.Subsection (6) requires the section to be read with section 330(2) (prevention of double deductions). If an expense on work equipment were deductible under Chapter 2 of Part 5, it would not be deductible under this section. See Change 82 in Annex 1.

Section 368: Fixed sum deductions from earnings payable out of public revenue

1602.This section allows for certain descriptions of employees a deduction of a sum fixed by the Treasury from earnings paid out of public revenue.

1603.It derives from section 199 of ICTA.

1604.Subsection (1) allows a deduction from earnings payable out of public revenue for fixed sum expenses relating to the duties that give rise to those earnings.

1605.Subsection (2) defines “fixed sum expenses”.

1606.Subsection (3) requires the section to be read with section 330(2) (prevention of double deductions). If the expense were deductible under Chapter 2 of Part 5, it would not be deductible under this section.

Chapter 5: Deductions for earnings representing benefits or reimbursed expenses
Background

1607.This Chapter deals with cases where the employer, or a third party, bears the cost of something that is taken into account as part of the employee’s earnings, but the employee is entitled to a deduction from those earnings in respect of that cost.

1608.This Chapter derives from provisions in sections 193 to 195 of ICTA and in sections 50 to 52 of FA 1989. In the majority of cases dealt with, the amount of such a deduction is expressed as being “equal to so much of that cost or, as the case may be, those expenses as fall to be included in those emoluments”. In the present Chapter, by contrast, it is possible to define the amount in question as “the included amount”, and then to say that “the deduction is equal to the included amount”.

1609.Another common thread in the provisions dealt with in this Chapter is that the amounts included in the employee’s earnings are generally expressed in terms of provision being made “by or on behalf of the employer” (or similar). It has not been possible to establish the original policy reasons for limiting the scope of the deductions to provision made in this way. There may be circumstances where the provision is by or on behalf of someone other than the employer and the amount is still chargeable as part of the employee’s earnings. As long as all the other conditions for the deductions are met, there seems no reason why a deduction should be withheld because the provision was made by a person other than the employer or someone acting on the employer’s behalf. The words “by or on behalf of the employer” (or similar) which appear in the source legislation are therefore omitted. To the extent that this change has any practical effect, it will be in favour of the taxpayer. See Change 101(A) in Annex 1.

1610.This Chapter does not deal with a deduction for expenses incurred and paid by the employee without any reimbursement. That kind of deduction is dealt with in Chapter 2 of this Part.

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