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HMRC internal manual

Employment Income Manual

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 part or all of the duties of an employment 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 charged on the basis of residence and domicile.

Where an employee is chargeable on receipt on all of the earnings from an employment the usual deduction rules apply. Where the earnings from duties performed outside the UK are only charged on remittance or are not charged to UK Income Tax 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 charged on receipt. It applies where:

  • an employee who is resident but not ordinarily resident in the UK performs part of the duties of an employment in the UK and part elsewhere - the earnings for the UK duties are charged on receipt under section 25 and the earnings for the non-UK duties are potentially chargeable on remittance under section 26
  • an employee who is not resident in the UK, whether or not ordinarily resident in the UK, performs part of the duties of an employment in the UK and part elsewhere - the earnings for the UK duties are charged on receipt under section 27 and there is no charge on the earnings for the non-UK duties

Section 354 prevents the deduction rules in sections 336 to 342 from being applied to permit a deduction from earnings charged on receipt in respect of expenses that relate to duties that give rise to other earnings of the employment. A similar rule applies to capital allowances, see EIM36880.

The effect is that expenses that are incurred in the performance of the non-UK dutiescannot be deducted from the UK-based earnings. Plant and machinery that is acquired foruse 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 charged 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 charged 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 charged on receipt and on remittance, see EIM31760.