Ruling leaves search and rescue pilots with soaring tax bills

30 March 2016

Andrew Hubbard  

Like me you have probably been enjoying The Night Manager on TV. My only criticism was that there was not enough about taxation in it. What was the tax residency of the main character and did he have to pay tax on the value of the accommodation at the hotel? I hear that there is a second series to come, so maybe there will be a chance to fill in these holes in the plot.

Accommodation is a difficult area in the tax system, as was recently shown in a tribunal case concerning the search and rescue helicopter team operating out of Stornoway on the Isle of Lewis. The team had to be available at 45 minutes notice to launch the helicopter which meant that they had to live within 15 minutes driving of the airport. The team were not provided with accommodation by their employer, but they were provided with an accommodation allowance, which they could use to meet the costs of rent or mortgage payments.

The individuals claimed that their accommodation allowance was not taxable, or in the alternative, that they should get a tax deduction for the accommodation costs. HMRC challenged this and the case was heard by the tax tribunal. The result was a completely victory for HMRC.

There was never any serious doubt about the treatment of the accommodation allowance. It was clearly employment income. If that were not the case it would be open to any employer to designate part of a salary as an expense allowance and claim it was not taxable.

More interesting was the question of the tax deduction for the expenses. The individuals claimed that it was a requirement of their duties that they lived close to the base and therefore the costs were an allowable deduction. The judge was not impressed. In the first case he pointed out that Lewis was a relatively small island and that most of it was only 15 minutes’ drive from the airport. Furthermore almost all of the employees at the airport did live within 15 minutes, regardless of whether they were emergency call out staff or not: it was simply that most of the accommodation on the island was within 15 minutes of the airport.

But the judge also considered the test for deductibility: for employees this is that the expenditure is wholly, exclusively and necessarily incurred in the performance of the duties of the employment. They failed on all four limbs of the test. The main purpose of the expenditure was normal living and it was not necessary for an employee to live in a particular house. Had the employer made it a condition of employment that a specified employee had to live in a specified house it is possible that the ‘necessary’ condition would have been met – but a general requirement to live near the place of work is not enough. So there goes my claim for accommodation expenses on the basis that I need to live near the office in case I am called in to write an emergency tax article at three in the morning.

Job-related accommodation provided by the employer is a different matter and had the company provided the team with living accommodation there would have been a respectable argument that the benefit was not taxable. The individuals here got themselves thoroughly confused between the two very different sets of tax rules and ended up facing a large tax bill.

If you would like any more information on this issue please contact Andrew Hubbard, or your usual RSM adviser.

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