SE31750 - The Schedule E expenses rule: expenses that are deductible from income charged under Case II or Case III of Schedule E: deductions from Case II income

Section 198(2) ICTA 1988

Some employees perform part of the duties of an employment in the UK and part elsewhere. Depending on their residence status, such employees may only be chargeable to UK income tax under Case II of Schedule E on the emoluments for their UK duties, or may be chargeable under Case II on the emoluments for their UK duties and potentially under Case III on the emoluments for their non-UK duties. SE40003 shows how emoluments are charged under Schedule E on the basis of residence.

Section 198(2) ICTA 1988 determines what deductions may be permitted from Case II emoluments by the Schedule E expenses rule in these circumstances. It applies where:

• an employee who is resident but not ordinarily resident in the UK performs part of the duties of an employment in the UK and part elsewhere. The emoluments for the UK duties are charged under Case II and the emoluments for the non-UK duties are potentially chargeable under Case III.
• an employee who is not resident in the UK, whether or not ordinarily resident in the UK, performs part of the duties of an employment in the UK and part elsewhere. The emoluments for the UK duties are charged under Case II and there is no Schedule E charge on the emoluments for the non-UK duties.

SE40221 explains how to calculate the emoluments chargeable under Case II of Schedule E.

Section 198(2) requires the Schedule E expenses rule to be applied as if the duties performed outside the UK are not duties of the employment. It applies in the same way to capital allowances.

The effect is that expenses that are incurred in the performance of the non-UK duties cannot be deducted from the Case II emoluments. Plant and machinery that is acquired for use in the performance of the non-UK duties does not qualify for capital allowances. This is illustrated by example SE31751.

Where emoluments for the non-UK duties are charged under Case III of Schedule E certain expenses can be deducted from those emoluments under Section 198(3) ICTA 1988, see SE31755. Capital allowances cannot be given against Case III income, see SE36880.

For 2002/03 onwards employees using their own vehicle or bicycle for business journeys are not permitted relief under Section 198 ICTA 1988 but may be entitled to mileage allowance relief, see SE31626. In these cases Section 197AG ICTA 1988 determines the amount of mileage allowance relief that can be deducted from Case II and Case III income, see SE31760.