HMRC attacks legitimate staff travel costs

Employee travel

Generally, travel costs incurred by employees in the course of doing their job are tax deductible expenses. Alternatively, if their employer pays for it or reimburses an employee it doesn’t count as taxable income. Note that for income tax purposes travel encompasses work-related accommodation.

If accommodation is merely convenient for the employee rather than necessary for their job and it’s provided by the employer, it’s liable to income tax and NI contributions as a benefit in kind. Whether accommodation was necessary or not was at the heart of the dispute between HMRC and BA, specifically between so-called back-to-back (B2B) flights out of Heathrow (LHR).

You cannot make an expense “necessary” simply by inserting a clause in an employee’s contract requiring it. The duties of the job must necessitate incurring the expense.

BA accommodation

Where its crew members made B2B flights, i.e. those with a relatively short gap in between, (usually long haul) BA has always operated a policy of providing accommodation free to the crew, near LHR to ensure they had adequate rest between flights and are readily available. Until 2016 BA accepted that this wasn’t necessary but merely convenient and helpful for it and its staff. Consequently, it reported the cost of providing the accommodation as a taxable benefit for the employees concerned. However, starting in 2016, new airline regulations made it necessary for BA to provide accommodation for B2B crews, which in BA’s view made it not taxable.

Counter argument

HMRC disputed BA’s argument for several reasons, some of which were dismissed by the Upper Tribunal fairly easily. HMRC’s main attack needed greater thought. In essence, HMRC argued that BA didn’t need to use B2B crews. It could instead use different crews for each flight thus making B2B flights and the need to provide accommodation unnecessary.

UT decision

The judges rejected HMRC’s argument and ruled in favour of BA. They commented that how BA chose to operate its business so that it complied with the 2016 regulations was not relevant to the employees but was a commercial decision relating to BA’s business model. It was entitled to make such decisions without interference from HMRC. It’s not within HMRC’s power to dictate how a business spends its money, but only to decide whether the expense is tax deductible. BA having made the choice to use B2B crews meant that the regulations required that they stay in accommodation near the airport. In other words, it was entirely necessary for them to stay in the accommodation as part of the duties of their job.

Wider application

This case shows that where a business is forced by law to operate in a certain way, which in turn means that employees, or their employer on their behalf, have to incur a cost in order to do their job, those costs are tax deductible (or not taxable if paid for or reimbursed by their employer). In practice, this can be relevant where health and safety rules required special equipment.