EIM31750 - The general rule for employees: expenses: expenses that are deductible where some or all of the duties are performed outside the UK: deductions from UK based earnings
Section 354 ITEPA 2003
Some employees perform some or all of their employment duties outside the UK. Depending on their residence and domicile status, such employees may be chargeable to UK Income Tax:
- on receipt on all of their earnings
- on receipt on their UK based earnings and on remittance on other earnings
- on receipt on their UK based earnings and not chargeable to UK income tax on other earnings
EIM40003 shows how general earnings are chargeable to UK income tax on the basis of residence and domicile and when these amounts become taxable.
Where all of an employee’s general earnings from an employment are taxable on receipt, the usual deduction rules apply.
Where only part of an employee’s general earnings from an employment are taxable on receipt because the remainder are either not chargeable to UK income tax, or are taxable on remittance, the deduction rules are modified. The modification is to match expenses to the earnings to which they relate.
Section 354 ITEPA 2003 determines what deductions may be permitted from UK based earnings taxable on receipt. It applies where:
- an employee who is UK resident elects to be taxed on the remittance basis and meets the section 26A requirement (see EIM40103), and performs only some of their employment duties in the UK - the earnings for the UK duties are taxable on receipt under section 15 and the earnings for the non-UK duties are potentially taxable on remittance under section 26
- an employee who is not resident in the UK performs some of their employment duties in the UK - the earnings for the UK duties are taxable on receipt under section 27 and the earnings for the non-UK duties are not chargeable to UK income tax
Section 354 prevents the deduction rules in sections 336 to 342 from being applied to permit a deduction from earnings taxable on receipt in respect of expenses that relate to duties that give rise to other earnings, which are not taxable on receipt. A similar rule applies to capital allowances, see EIM36880.
The effect is that expenses that are incurred in the performance of the non-UK duties cannot be deducted from the UK-based earnings. Plant and machinery that is acquired for use in the performance of the non-UK duties does not qualify for capital allowances. This is illustrated by example EIM31751.
Where earnings for the non-UK duties are taxable on remittance under section 26, certain expenses can be deducted from those earnings under section 353 ITEPA 2003, see EIM31755. Capital allowances cannot be given against earnings taxable on remittance, see EIM36880.
Employees using their own vehicle or bicycle for business journeys are not permitted relief under sections 336 to 340 ITEPA 2003 but may be entitled to mileage allowance relief, see EIM31330. In these cases, section 232 ITEPA 2003 determines the amount of mileage allowance relief that can be deducted from earnings taxable on receipt and on remittance, see EIM31760.