SE31755 - The Schedule E expenses rule: expenses that are deductible from income charged under Case II or Case III of Schedule E: deductions from Case III income

Section 198(3) ICTA 1988

SE31750 explains how the Schedule E expenses rule is adapted by Section 198(2) ICTA 1988 to apply to employees who perform part of their duties in the UK and part elsewhere and who are chargeable under Case II of Schedule E on the emoluments for their UK duties. The purpose is to prevent a deduction from Case II emoluments for expenses that are incurred in performing the non-UK duties of the employment.

Where such an employee is resident but not ordinarily resident in the UK the emoluments for the non-UK duties are brought into charge under Case III of Schedule E to the extent that those emoluments are received in the UK, see SE40301.

Section 198(3) ICTA 1988 determines the extent to which expenses that are incurred in the performance of the duties giving rise to emoluments charged under Case III can be deducted from those emoluments.

A deduction can only be permitted for expenses that pass all of the tests imposed by Section 198(1) ICTA 1988, see SE31630. Of those expenses a deduction can only be given for any that are:

• defrayed out of the emoluments charged under Case III because they are received in the UK, or
• defrayed in the UK

• in that year of assessment, or
• in any earlier year of assessment in which the employee was resident in the UK.

The effect of this restriction is illustrated by example SE31756.

No deduction for capital allowances can 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.