Were accommodation expenses tax deductible?

Employment expenses

You’re probably familiar with the tough rules which apply to tax relief for employment expenses. These were the main subject in Jayamath Kunjur and HMRC 2021 . The case involved tax relief for travel-related expenses which are usually only allowed where they meet the conditions set out in s.337 or s.338 Income Tax (Earnings and Pensions Act) 2003 (ITEPA) . Surprisingly, the First-tier Tribunal (FTT) didn’t refer to these but instead applied the trickier general rules for expenses in deciding the case. It’s not clear why this was but it seems probable that Kunjur (K) based his appeal on s336 . This was surprising as it precludes tax relief for expenses qualifying for relief under the more generous s.337 and s.338 . This wasn’t the only surprise.

Travel (accommodation) expenses

K was a dentist in Southampton but was employed at a hospital in south London. He was training to be a maxillofacial surgeon but was unable to do so nearer to his home in Southampton. He tried commuting to London but found it impractical. He therefore rented accommodation close to the hospital in London. He stayed there in the week and one weekend in six for on-call duties. He claimed the costs of the accommodation were wholly, exclusively and necessarily incurred in the performance of his duties ( s.336 ITEPA ). HMRC decided that K’s employment contract didn’t oblige him to rent premises close to the hospital and that working there was a personal choice. It refused his claim and demanded extra tax. It also charged K a penalty because it believed he had acted carelessly in claiming the relief it believed he wasn’t entitled to. K appealed to the FTT.

All or nothing

The FTT considered closely the reason K incurred accommodation expenses . Referring to s.336 it said “The wholly and exclusivity test will only be met in respect of a particular expenditure, where there is no private benefit to the holder of the employment, other than a merely incidental benefit” . Normally, any incidental benefit doesn’t stop the whole expense being tax deductible. Conversely, if there’s any benefit which isn’t incidental none of the expense is deductible. In other words, it’s a all-or-nothing tax deduction.

Common sense v the law

The FTT disagreed with HMRC’s main argument. It decided that K was obliged to incur the expenditure on accommodation close to the hospital because of his job. That seems a reasonable view. However, this left the all-or-nothing point to overcome. The FTT did so by taking the view that the accommodation expenses could be apportioned between periods that K necessarily occupied the property because of his job and periods when he didn’t. Any private benefit he obtained from occupying it when he was in London was incidental, so K was entitled to tax relief for that portion of the expenses. The remaining cost was all private benefit and no relief was due for that part. We don’t entirely agree with the FTT’s logic but there’s no doubt that proportioning the expense produced a fair result if not one that is wholly consistent with tax law.

Penalties. Having decided that K was entitled to tax relief for a substantial part of the expenses, it naturally concluded that he had not acted unreasonably in claiming the tax deduction. It therefore kicked out HMRC’s demand for penalties.