In order to get tax relief on an expense, an employee must be able to satisfy the strict rules outlined in legislation and developed in case law. This applies whether the expense is reimbursed by the employer or met by the employee with no reimbursement from the employer.
In order to obtain a deduction, the expense incurred by the employee must satisfy all of the tests laid out in ITEPA 2003, s 336, ‘the general rule’. There is a long line of case law which interprets the key phrases.
There are some exceptions to the general rule, where there are specific legislative rules. If there is a specific rule then it is the specific rule which will apply. This means that it is better to see whether a specific deduction applies before turning to the general rule. If there is a specific allowable deduction then it is usually clear in which circumstances this will apply. If there is no specific deduction then the employer / employee should turn to the general rule on expenses. The general rule imposes onerous requirements on the employee to show that the expenditure was one for the purposes of his employment.
The general rule
The employee is entitled to a deduction from earnings for an expense if the expense satisfies the following tests:
- the employee must be obliged to incur and pay it as the holder of the employment
- the amount is incurred wholly, exclusively and necessarily, in the performance of the duties of the employment
Only if all the elements of these tests are met is a tax deduction granted. The restrictive nature of these tests has been emphasised in case law. In Lomax v Newton the judgment stated that “the words are indeed stringent and exacting: compliance with each and every one of them is obligatory if the benefit of the rule is to be claimed”. Lomax v Newton 34 TC 558 (subscription sensitive)
The general rule has long been interpreted by the courts in a very restrictive way. If an amount is not deductible under the general rule then deductions under other provisions should be considered. If an amount is deductible under the travel expenses rules, or any other section of legislation, no deduction should be claimed under the general rule, ie you cannot get two deductions for one expense. More details on this are found in the Travel expenses and Subsistence expenses guidance notes.
HMRC guidance is at EIM31620 onwards.