[2011] UKFTT 245 (TC)

Appeal number: TC/2010/04317

Income Tax - deduction for expenses – airline pilot - expenses incurred for issue of a licence with the Civil Aviation Authority – s343 Income Tax (Earnings and Pensions) Act 2003 – Appeal refused.

FIRST-TIER TRIBUNAL

TAX

PHILIP E EDGAR Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL JUDGE: John M Barton, WS

Member: James D Robertson, CA

Sitting in public at Urquhart House, Beechwood Business Park, Inverness on 21 March 2011

John E Sutton FCA, Goldwells, Nairn, for the Appellant

Mrs Joyce Ballingall, for the Respondents

DECISION

1. The Appellant (“Mr Edgar”) made a claim under s343 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”) in respect of the expenses incurred for issue of a licence with the Civil Aviation Authority. The general expenses amounted to £17,382.60 with travelling expenses of £2,611.68, of which £8,691 and £1,304 were set against his earnings for the year 2006/2007. Her Majesty’s Revenue and Customs (“HMRC”) allowed expenses amounting to £2,518 and disallowed the balance of the general expenses amounting to £6,173 and all of the travelling expenses. The Tribunal refuses Mr Edgar’s appeal against that decision.

2. A Notice of Appeal had been lodged on behalf of Mr Edgar on 4 May 2010. A Statement of Case was lodged by HMRC, and the Appeal was set down for hearing at Inverness on 21 March 2011.

On 27 October 2010, a Direction was issued whereby HMRC were required to lodge with the Tribunal two copies of a bundle incorporating inter alia all the documents on which each party intended to rely. Two copies were duly lodged with the Tribunal.

3. The documents in the bundle were as follows

(A) Items 1-51, comprising correspondence between the parties.

(B) Items 1-71 comprising other documents, namely a list of receipts and other invoices, Mr Edgar’s Tax Return for the year 2006/2007 and the Notice of Appeal with accompanying papers.

(D) Items 1-8 comprising the relevant legislation, namely s9A, s28A, s49B and 50(6) of Taxes Management Act 1970 and s333, s336, s337 and s343 of ITEPA 2003.

(E) Items 1-50 comprising the following Reports

T Haythornwaite and Sons v Kelly 11 TC 657,

Ansell v Brown 73 TC 338,

Hinsley & Another v HMRC SPC 00569,

Weston (The Queen on the Application of) v Commissioners of Inland Revenue 76 TC 207.

(F) Statement of agreed expenses for airline pilots.

4. In the course of the hearing, Mr Sutton lodged documents (C) 21-23 which had previously been sent to HMRC, and documents (C) 24-25 comprising conversion requirements for airline pilots, and a statement showing the extent of mutual recognition of airline pilot licences.

5. Mr Sutton led the evidence of Mr Edgar; Mrs Ballingall did not lead any evidence for HMRC.

Material Facts

6. The material facts, which were not in dispute, were as follows,

(1) The Civil Aviation Authority (“CAA”) regulates all aspects of aviation in the UK. Its responsibilities include the licensing of flight crew.

(2) The CAA had directed that

A person shall not act as a flight crew member of a civil aeroplane/helicopter registered in a JAA Member State unless that person holds a valid licence and rating complying with the requirements of JAR-FCL and appropriate to the duties being performed, or an authorisation as set out in JAR-FCL 1.085/2085 and/or 1.230/2.230. The licence shall have been issued by:

A JAA Member State; or

Another ICAO Contracting State and rendered valid in accordance with JAR-FCL 1015/ 2015 (b) or (c).

(3) Mr Edgar is a UK citizen. He lived and was resident in South Africa for a number of years during which time he paid for and obtained a South African Commercial Pilot's licence. Between 2001 and 2006, he was engaged in flying commercial aeroplanes in Southern Africa.

(4) It was Mr Edgar’s intention to return to the UK. South Africa was not a JAA Member State; and in order to continue his profession as an Airline Pilot, Mr Edgar was required to carry out additional training to become qualified to carry out commercial flights within the UK. In anticipation of this, Mr Edgar started a distance learning course in 2005.

(5) Upon returning to UK in 2006, Mr Edgar was required (in terms of the CAA regulations) to undertake theoretical knowledge instruction as determined by an approved training provider and pass all the relevant theoretical knowledge examinations. He was also required to undertake flying training and pass the relevant skills test. Mr Edgar went to Atlantic Flight Training, which is one of three training companies approved by the CAA.

(6) The particular course that Mr Edgar was required to undertake and the number of flying hours were less than for any pilot starting from scratch as he had already obtained much of the required experience through his South African Pilot's Licence.

(7) Mr Edgar became an employee of Highland Airways on 24 July 2006.

(8) Prior to that date, Mr Edgar incurred the following expenses

Headset repair £92.71

Bristol ground school – Distance learning (Module 1) £1,100.00

Books and online question bank £101.89

Bristol ground school – Distance learning (Module 2) £800.00

Bed and Breakfast x 12 nights (Ground Refresher Course) £180.00

Accommodation (While taking exams) £140.00

Online Question Bank £50.00

Pilot Jobs Network registration £4.65

Civil Aviation Authority, Exam fees £330.00

Bed and Breakfast x 11 nights (Ground Refresher Course) £254.00

Accommodation (While taking exams) £35.00

Flying Course Statement £11,725.51

FCL Licence: CPL (A) Skill Test £691.00

FCL Licence Rating: IR (A) Record Skill Test £691.00

Licence Issue £362.00

Hire Car (Job Interview) £108.81

M6 Toll Charge (Interview) £3.50

Bed and Breakfast (Interview) £30.00

M6 Toll Charge (Interview) £3.50

Suit, shoes and tie for interview £238.99

Civil Aviation Authority, (May 05) Exam fees £440.00

Total £17,382.56

Mr Edgar also incurred travel costs of £2,611.68.

(9) For tax purposes, these expenses were split over the two years (2006/2007 and 2007/2008) and Mr Edgar claimed expenses of £8,691 and £1,304 in respect of the year 2006/2007.

(10) Under the provisions of s9A of Taxes Management Act 1970 (“TMA 1970”) HMRC opened an enquiry into these expenses and resolved to allow the following expenses

Pilot Jobs Network registration £4.65

Civil Aviation Authority, Exam fees £330.00

FCL Licence: CPL (A) Skill Test £691.00

FCL Licence Rating: IR (A) Record Skill Test £691.00

Licence Issue £362.00

Civil Aviation Authority, (May 05) Exam fees £440.00

Total £2,518.65

HMRC disallowed the other expenses and the travel costs that had been claimed.

However, under the provisions of EIM 50051, HMRC separately allowed flat rate expenses of £850 and £100 with a further £661 in respect of a noise-cancelling headset.

Legislation

7. The relevant provisions of ITEPA 2003 are as follows –

Section 336 Deductions for expenses: the general rule

(1) The general rule is that a deduction from earnings is allowed for an amount if—

(a) the employee is obliged to incur and pay it as holder of the employment, and

(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

(2) The following provisions of this Chapter contain additional rules allowing deductions for particular kinds of expenses and rules preventing particular kinds of deductions.

(3) No deduction is allowed under this section for an amount that is deductible under sections 337 to 342

Section 337 Travel in performance of duties

(1) A deduction from earnings is allowed for travel expenses if—

(a) the employee is obliged to incur and pay them as holder of the employment, and

(b) the expenses are necessarily incurred on travelling in the performance of the duties of the employment………….

Section 343 Deduction for professional membership fees

(1) A deduction from earnings from an employment is allowed for an amount paid in respect of a professional fee if—

(a) the duties of the employment involve the practice of the profession to which the fee relates, and

(b) the registration, certification, licensing or other matter in respect of which the fee is payable is a condition, or one of alternative conditions, which must be met if that profession is to be practised in the performance of those duties.

(2) In this section “professional fee” means a fee mentioned in the following Table.

Table

……………………

11. Fee (including any related medical or technical examination fee) payable, on the issue or renewal of a licence by the Civil Aviation Authority, by—

(a) an aircraft maintenance engineer,

(b) an air traffic controller or student air traffic controller,

(d) a flight information service officer.

Submissions

8. Mr Sutton pointed out that ITEPA 2003 allows expenses of training and other related expenses to be claimed even if the person making the claim and incurring the expenditure was not actually employed at the time that the training was carried out. The CAA did not themselves carry out the training that was required to obtain the UK Commercial Pilot's Licence but they did have accredited Flying Schools which were allowed to undertake the training on the CAA's behalf and to achieve the standard required. Section 343 of ITEPA 2003 specifically covered any fee payable “on the issue or renewal of a licence by the Civil Aviation Authority”. Mr Sutton emphasised that s 343 did not require the payment to be made to the CAA. He also referred to the following explanatory statement covering s343 published by HMRC and in particular, the words “or other matter”

As a consequence of adding to the list in subsection (2) it has been necessary to add a reference to "licensing or other matter' in section 343(1)(b).

In the course of updating the list of fees which qualify for deduction as explained above, it became apparent that certain of the new fees relate to the issue or grant of certificates or licences, as well as to retention or renewal of an existing status. In order to achieve a consistent approach for all professional fees, subsection (2) makes clear that fees payable for initial registration entry on a particular register or on the issue of a certificate or licence are covered by the relief in all cases.

And a further commentary in relation to s343 to s345

1482. The following three sections rewrite section 201 of ICTA. The sorts of fees and contributions that are covered by section 201(2) have to be paid before an employee can, lawfully, begin to practise the particular profession or occupation to which the fees relate. They do not therefore meet the "in the performance of the duties" test in section 198 of ICTA, rewritten in section 336(1)(b) of this Act. The subscriptions covered by section 201(3) are voluntary in nature, in the sense that employees do not have to join the body concerned, and so do not meet the "necessarily" test in section 198, again rewritten in section 336(1)(b).

1483. There is another distinction between the expenses allowable under those two subsections. Section 201(2) of ICTA lists the fees paid that qualify for deduction. Section 201(3) gives a general description of the sorts of bodies that are eligible to apply to the Board of Inland Revenue for approval under that subsection, by reference to their character and the activities they pursue.

9. In reply, Mrs Ballingall adopted the explanation given by her colleague Mrs D J Carey in her letter to Mr Sutton’s then firm dated 11 February 2010

Section 343 ITEPA 2003 allows a deduction for fees and contributions and related costs paid to certain named bodies subject to two conditions:

1. the duties of the employment must involve the practice of the profession to which the fee relates and

2. the registration, certification, licensing or other reason for paying the fee is a condition that must be met before the person may practice the profession relevant to performing the duties of the employment.

I am not disputing that both these conditions have not been met. My disagreement with your interpretation of the statute is with the sentence `related costs paid to certain named bodies'. What I am trying to convey is that a deduction for an expense and related cost under Section 343 ITEPA is restricted to the fees paid to certain named bodies approved by HM Revenue & Customs and only those bodies. This means that 'related costs', which you refer to in your letter and which is written in the statute of Section 343, can only apply to a fee paid to an approved named body. The schedule you sent listing receipts of amounts paid mention only one approved named body, the Civil Aviation Authority. Whilst I accept that the other expenses are related costs in learning to fly, they are not related to the actual fees paid to the CAA. They are not therefore allowable.

We have already discussed that the expenses paid cannot be allowed under Section 336 ITEPA 2003 because they were not incurred in the performance of the duties of the employment; a fact that you appeared to accept in your telephone call to us on the 1 June 2009. You have not presented me with any further evidence to change my view or alter the decision. The other expenses listed that do not qualify for a deduction under Section 343 do not qualify under Section 336 either.

Mrs Ballingall added that the foregoing was approved when the matter was the subject of review.

10. In relation to travelling expenses, Mrs Ballingall pointed out with reference to s337 that a deduction from earnings can only be allowed for travel expenses if the employee is obliged to incur and pay them as holder of the employment, and the expenses are necessarily incurred on travelling in the performance of the duties of the employment. In Mr Edgar’s case, all the relevant travelling expenses were incurred prior to him commencing employment on 24 July 2006.

Mrs Ballingall pointed out that the “flat rate” expenses of £850 and £100 and the further £661 in respect of a noise-cancelling headset, had been allowed by way of extra statutory concession.

Reasons

11. The question before the Tribunal related to specific expenses which were disallowed by HMRC – one-half of which had been claimed in respect of the year 2006/2007.

12. It may be convenient to consider these expenses in the following groups

Group A

Bristol ground school – Distance learning (Module 1) £1,100.00

Bristol ground school – Distance learning (Module 2) £800.00

Flying Course Statement £11,725.51

Group B

Headset repair £92.71

Books and online question bank £101.89

Online Question Bank £50.00

Group C

Bed and Breakfast x 12 nights (Ground Refresher Course) £180.00

Accommodation (While taking exams) £140.00

Bed and Breakfast x 11 nights (Ground Refresher Course) £254.00

Accommodation (While taking exams) £35.00

Bed and Breakfast (Interview) £30.00

Suit, shoes and tie for interview £238.99

Group D

Hire Car (Job Interview) £108.81

M6 Toll Charge (Interview) £3.50

Other travel £2,611.68

13. It was not disputed that Mr Edgar had indeed incurred all of the foregoing expenses and that all the expenses had been incurred prior to Mr Edgar commencing UK employment on 24 July 2006.

14. Section 336 of ITEPA 2003 sets out the general rule that a deduction from earnings can only be allowed for an amount “if ………….the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment”. At the time when Mr Edgar incurred the relevant expenses, he had not commenced employment and it follows that the expenses were not incurred “in the performance of the duties of the employment”. It was accepted by Mr Sutton that Mr Edgar could not make a relevant claim under s336.

15. As is illustrated in the explanatory notes referred to by Mr Sutton, Section 343 of ITEPA 2003 allows certain expenses which would not be covered by a strict reading of s336.

16. Subsection (1) of s343 is subject to two conditions, but the substantive statement is that

a deduction from earnings from an employment is allowed for an amount paid in respect of a professional fee.

Subsection (2) provides that the expression “professional fee” is defined with reference to the following Table. The relevant paragraph of the Table is paragraph 11 which reads

Fee (including any related medical or technical examination fee) payable, on the issue or renewal of a licence by the Civil Aviation Authority, by…….. (c) a member of the flight crew of an aircraft ……

It is significant that the word “fee” is repeated and some indication of the breadth of meaning of the word can be taken from the words in parenthesis. There is no stipulation that the payment is made to the CAA, but the paragraph does require that the payment is upon “the issue or renewal of a licence” by the CAA. It follows therefore, in relation to a member of a flight crew, such as Mr Edgar, that a deduction for an item of expenditure can only be successfully claimed if it is a “fee” and that it was paid on the issue or renewal of a licence by the CAA. This question has to be asked in relation to each of the items listed above.

17. Reverting to the two conditions in s343(1), they are

(a) the duties of the employment involve the practice of the profession to which the fee relates, and

Condition (a) does not give rise to difficulty as Mr Edgar was indeed employed as a pilot.

Condition (b) requires that the subject matter of the particular “fee” was a prerequisite of Mr Edgar performing his duties as a pilot.

18. Before leaving s343(1)(b) it is recalled that Mr Sutton placed much emphasis on the words “or other matter”. In the opinion of the Tribunal, the words “or other matter” must be interpreted eiusdem generis with the preceding words “registration”, “certification” and “licensing”. It therefore follows that a fee payable for “training” or any other activity beyond the wider meaning of registration, certification and licensing does not qualify.

19. In Group A above, the two items identified as “Bristol ground school – Distance learning” would appear to be two parts of the training course undertaken by Mr Edgar before he left South Africa, particularly as they are dated February and August 2005 – when Mr Edgar was still in South Africa. Undoubtedly these courses will have assisted Mr Edgar in gaining a state of knowledge whereby he was eventually able to pass the necessary CAA examinations, but looking to s343(1)(b), there was no evidence that the fees paid by Mr Edgar for these courses were paid for any registration, certification, licensing or other similar matter; nor were they fees “payable, on the issue or renewal of a licence by the Civil Aviation Authority” such as would satisfy the definition of a “professional fee” for the purposes of paragraph 11.

20. The remaining item in Group A is the Flying Course Statement. The Brochure of Atlantic Flight Training indicated that the aim of the course was to convert pilots holding a non-JAA Commercial Pilots Licence to the level of theoretical knowledge and flight proficiency necessary for the issue of a JAA Commercial Pilots Licence. Individual invoices for this item were not produced but the relative statement identified numerous occasions for the hire of either a simulator or an aircraft and for charges for approaching and landing at various airfields. It was also stated in the Brochure that examination fees were to be paid directly to the CAA.

21. It was apparent from the evidence that the essential aspect of the Flying Course was in training. There was no evidence that the fees paid by Mr Edgar for these courses were paid for any registration, certification, licensing or other similar matter, as is stipulated for in s343(1)(b).

22. Furthermore, although there was some indication that the Flying Course was mandatory before the CAA might issue a licence; the fees attributable to that Course were fees for training, and not “payable, on the issue or renewal of a licence by the Civil Aviation Authority” such as would satisfy the definition of a “professional fee” for the purposes of paragraph 11.

23. The items in Group B referred to equipment and aids to learning may have been supportive to Mr Edgar in his ultimately obtaining his CAA licence but none of the items were in themselves for registration, certification, licensing or other similar matter such as is required under s343(1)(b) nor were the particular expenses incurred “on the issue or renewal of a licence” by the CAA such as is required under paragraph 11.

24. The Group C items were all of a personal nature, and although some of them were related to the time that Mr Edgar sat the CAA exams, none of these items could be regarded as “fees” such as might be covered by s343.

25. Mr Sutton did not address the Tribunal in relation to travel expenses such as are identified in Group D. For the reasons already given, the Tribunal does not regard any travel expenses as coming under s343. For the sake of completeness, it should be acknowledged that travel expenses can be claimed under s337, but such a deduction can only be claimed where the employee is obliged to incur and pay them as holder of the employment, and the expenses are necessarily incurred on travelling in the performance of the duties of the employment. As Mr Edgar was not in employment when these expenses were incurred, he is not entitled to any deduction.

26. The appeal is accordingly refused.

27. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

Material Facts

JOHN M BARTON, WS

TRIBUNAL JUDGE

RELEASE DATE: APRIL 2011

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