The Upper Tribunal (UT) has dismissed HMRC’s appeal in HMRC v British Airways Plc, confirming that hotel accommodation provided to cabin crew at London Heathrow Airport (Heathrow) between linked transatlantic flights qualified for tax relief under section 337 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). HMRC had sought to recover approximately £5.78 million in income tax and National Insurance contributions in relation to the accommodation arrangements provided by BA to cabin crew. The full judgment can be found here.

Legislative Framework

As a brief reminder, section 337 ITEPA provides tax relief for travel expenses where an employee is obliged to incur and pay them as a holder of the employment, and the expenses are necessarily incurred on travelling in the performance of the duties of the employment.

The Facts

BA operated a number of back-to-back (“B2B”) transatlantic rotations. Typically, cabin crew would complete a return transatlantic flight, stay at hotel accommodation near Heathrow and then operate a second transatlantic return flight as part of the same overall rotation. Since 2016, BA has been subject to the European Aviation Safety Agency Flight Time Limitation Regulations (“EASA Regulations”), which require cabin crew on certain B2B rotations to undertake mandatory rest periods in suitable accommodation provided by the airline.

To comply with these requirements, BA contractually required cabin crew on B2B rotations to stay in Heathrow hotel accommodation between flights. Compliance was monitored, and failures were capable of triggering disciplinary action. Prior to the regulatory changes, the Heathrow accommodation had been reported as a taxable benefit because use of the accommodation was optional. Following the introduction of the EASA regulations, BA considered that the accommodation had become a mandatory feature of the employment and therefore no longer gave rise to a taxable benefit. HMRC challenged that position and appealed after the First-tier Tribunal (FTT) had found in BA’s favour.

HMRC’s Grounds of Appeal

 Following BA’s victory in the FTT, HMRC appealed to the UT on five grounds. In broad terms, HMRC argued that the FTT was wrong to conclude that:

1. the accommodation expense was incurred in the performance of the duties of employment;
2. the accommodation expense was incurred on travelling in the performance of those duties;
3. the expense was necessarily incurred;
4. the accommodation related to attendance at a temporary workplace under section 338 ITEPA; and
5. the expense qualified under section 336 ITEPA.

In the UT, the principal issue was whether the expenditure on the Heathrow accommodation fell within section 337 ITEPA. As such, the parties’ arguments focused primarily on Grounds 1, 2 and 3.

Ground 1: Was the accommodation expense incurred “in the performance of the duties” of employment?

HMRC argued that staying at the Heathrow hotel merely put crew members in a position to perform their duties rather than forming part of those duties themselves. BA argued that compliance with the accommodation requirement was itself a duty of employment. The UT agreed with BA and dismissed HMRC’s appeal on this ground. It found that the regulatory requirements applicable to B2B rotations, coupled with the contractual obligations imposed on cabin crew, required crew members to stay in the Heathrow accommodation.

This was not a personal or social obligation but formed part of the duties of their employment. The UT noted that, in this respect, there was no material difference between the Heathrow accommodation and accommodation provided between flights at overseas locations. Accordingly, the accommodation expense was incurred in the performance of the duties of employment.

Ground 2: Was the accommodation expense incurred “on travelling” in the performance of the duties of employment?

HMRC challenged the FTT’s reliance on the aviation-regulatory concept of Heathrow as a “slip station” when deciding that the crew were travelling during the rest period. The UT accepted that the FTT’s reasoning on this point was wrong in that the regulatory classification did not, by itself, determine whether the crew were travelling for section 337 purposes. However, the error was not material to the outcome. Looking at the rotation as a whole, the UT concluded that the journey continued throughout the B2B rotation; rather, it continued until the crew were released from their duties and free to return home.

“Home base” was a regulatory concept and was not the same as the employee’s home. The UT therefore concluded that the accommodation expense was incurred on travelling in the performance of the duties of employment and dismissed Ground 2.

Ground 3: Was the accommodation expense “necessarily incurred”?

HMRC argued that the accommodation was required because BA had made a commercial choice to operate B2B rotations, rather than because the duties themselves dictated the expense. BA’s argument was that once the rotation had been selected and crew rostered, the crew were required to stay in the hotel. The UT accepted that the “necessarily incurred” test is strict such that an employer cannot make an expense deductible merely by inserting an obligation into an employment contract. The UT noted that the relevant question was whether the duties themselves imposed the expense.

The regulatory requirements, together with the duties associated with the B2B rotation, required the crew to undertake the prescribed rest period in suitable accommodation so that they could commence the subsequent flight in a compliant manner. The cabin crew on B2B rotations had no option but to stay in the Heathrow accommodation. Accordingly, the UT concluded that the accommodation expenditure was necessarily incurred in the performance of the duties of employment. Therefore, Ground 3 was dismissed.

Grounds 4 and 5: Sections 338 and 336 ITEPA

Having concluded that the accommodation qualified for relief under section 337 ITEPA, the UT considered it unnecessary to determine HMRC’s remaining grounds of appeal concerning sections 336 and 338 ITEPA.

Conclusion 

The UT’s decision is a significant victory for British Airways and provides valuable guidance on the operation of section 337 ITEPA. It also serves as a reminder that the employment expenses rules remain a complex area of tax legislation, requiring careful consideration of both the contractual arrangements and the practical reality of the working relationship. As with many employment tax disputes, the outcome will ultimately depend on the particular facts of each case, and seemingly small factual differences can have a significant impact on whether relief is available.

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Disclaimer:  Chartergate Legal Services Ltd has drafted this update to provide a general overview of the relevant law and developments at the date of issuing only.  This is provided as a general overview and should be taken as such.  It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.