A special commissioner held that two airline pilots were not entitled to set against their employment income payments made to reimburse their employers for the cost of training when they left their employment, since the expense had not been incurred wholly exclusively and necessarily in the performance of their duties.

Facts

These were appeals by two commercial airline pilots. At different times each taxpayer left the employ of one airline and went to be employed by another. Each of them had received training free of charge from the first employer. In each case the pilot's contract of employment with that employer provided that if the pilot should leave employment within a fixed period after receiving that training the employee should pay a sum to the employer. That provision was inserted in most airline pilots’ contracts to avoid one airline bearing the cost of training which benefited another airline.

Both taxpayers paid as they were obliged to. Each then sought to set the amount of that payment against his employment income. The Revenue claimed that an expense of that nature was not deductible because it was not an expense which was expended wholly, necessary and exclusively in the performance of the employee's duties.

Issue

Whether the taxpayers were obliged to incur the amounts paid to their employer wholly, exclusively and necessarily in the performance of the duties of their employment; and whether, if deductible at all, the payments were deductible in the year they were paid or in the year the obligation arose.

Decision

The special commissioner (Charles Hellier) (dismissing the appeals) said that under ICTA 1988, s. 198, the nature of the duties of the employment objectively viewed required the expense to have been incurred wholly and exclusively in the performance of the duties.

The question then was what were the duties of the employment objectively determined. That issue arose in Taylor v Provan [1965] AC 125 where Lord Reid regarded an essential feature of a particular office to be that it could be filled only by one particular person. Thus the duties were to be determined by reference to that person's particular circumstances. The proper question was whether the payment made by the taxpayers was ‘expended… in the performance of their duties not whether the liability to pay was incurred in such performance. It did not matter when the liability was incurred or when it arose, the question was simply whether the actual amount was expended wholly, exclusively and necessarily in the performance of the duties of employment.

The payment made was not expended wholly, exclusively and necessarily in the performance of the pilot's duties. It was not paid as a necessary consequence of continuing (after notice to terminate was given) to perform the duties of the contract. It was not expended in the activities thereafter required to perform those duties. It might have been expended as a consequence of the contract pursuant to which the remainder of the duties were performed, but objectively viewed those duties were those of an airline pilot not of someone obliged to make a payment. As a result the expenditure could not be described as being either in the performance of those duties or necessarily expended in such performance.

The next question was whether, had the pilot been required to reimburse the costs of training when the training was undertaken, that expense would have been deductible under ICTA 1988, s. 198. Without the training the taxpayers could not fulfil all of the duties for which he was employed: without the training the pilot could not do the job. Thus the expense would not have been one incurred merely to prepare to do the job or to do it better. It was necessary for a pilot to have undertaken the training before he could do the job. But that did not mean that the expense would have necessarily been incurred in the performance of the duties of the job viewed objectively. Although the expense was necessary, the nature of the job did not compel the expense because the job was not that of going on training courses, but that of flying aircraft. There was a difference between an expense which each and every occupant of the employment had to incur as part of his duties, and a one off expense which a particular employee had to incur if he was to be able to do the job. A pilot who was already type- rated for the aircraft he was to fly before he became employed to fly them would not be required to incur the expense. Thus even if the expense was incurred in the performance of the particular pilots’ duties, it was not an expense which the nature of the employment required and was thus not an expense necessarily incurred in the performance of those duties.

The benefit of an eligible deduction properly attributable to a tax year and an employment was available for that tax year only if the employment was held in that tax year and produced emoluments in that year from which it might be deducted. Section 198 provided that the deduction was for the amount ‘so’ incurred or defrayed. The deduction was attributable to the year in which the unconditional obligation to incur and defray arose, not when the expense was paid. That construction might mean that it would not always be possible to determine whether a deduction was available for a tax year in circumstances where the obligation had been incurred but the amount not yet defrayed – for the deduction was available only if and once there was a defrayment. But the time of defraying did not affect the tax period for which the section permitted a deduction and that was the year of assessment in which the obligation to incur and defray was incurred.

(2006) Sp C 569.
Decision released 9 November 2006.