Doctor in the house

KEY POINTS

• Banerjee allowed a doctor to claim training costs under TA 1988, s 198.
• Previous cases had said this was not ‘in performance of the duties’.
• Court of Appeal upheld on a majority, despite the case of Decadt.
• Why is the law on a benefit in kind, ITEPA 2003, s 250, so different?

The rules for obtaining a deduction for expenses incurred as an employee are notoriously strict. It is therefore very surprising that a recent Court of Appeal case, CRC v Banerjee [2010] EWCA Civ 843, found in the taxpayer’s favour.

What is even more surprising is that the case ever had to happen at all, because a simple change to the way in which the employment contract had been constructed would probably have made the expense clearly deductible.

Dr Piu Banerjee was, during the years in question, a specialist registrar in dermatology. Over the five years of the post, she worked mainly for the St George’s hospital trust, but a year in the middle was spent with the St Helier trust.

The duties of the post were not, however, set by the hospitals, they were determined by a regional organisation, the South Thames Deanery, who also funded the position.

Although she would see patients and treat them, the position was intended to be supernumerary to the complement of doctors needed to do the work at the hospitals.

It was a condition of Dr Banerjee’s post that she held a ‘training number’ from the NHS throughout it. As part of this commitment, she had to attend courses, lectures and other training events.

Although in some hospitals these courses would either be paid for by the hospital or arranged by them in-house, in her post they were not and she had to meet the costs herself. It was these costs, which she claimed as a tax deduction, that had subsequently been denied by HMRC.

Her supervisor at St George’s said in written evidence to the General Commissioners that the specialist registrar post is:

‘… essentially a training post and that the above courses are a condition of their training and thus the duties of the post as dictated by the Regional Deanery. Seeing patients, i.e. the service commitment, is only one aspect of training.’

Specialist registrar contracts

A better picture of how these contracts worked can be gleaned from another very similar case, which I am going to look at in more detail later, CRC v Decadt [2008] STC 1103.

Here, the General Commissioners found that:

‘a. The respondent who is a qualified registrar in general surgery and who is able to practice general surgery was employed as a specialist registrar in general surgery at North Manchester Healthcare Trust …

b. The respondent had been selected for employment from 180 doctors and he had been issued with a National Training Number for the duration of his participation in the training programme as a specialist registrar in general surgery.

c. …he is required under the terms of the contract to attend specific training courses for the purposes of obtaining a Certificate of Completion of Specialist Training.’

This certificate was needed before he could apply for a post as a consultant. The point of specialist registrar posts was, therefore, to train qualified doctors so that they were in a position to take up posts as consultants in a particular specialism.

Returning to Dr Banerjee’s case, this was the crux of the argument put in her favour to the Court of Appeal:

‘The purpose of the training contract was to train her as a dermatologist. That was why her post was a supernumerary one. She was being paid a salary to undergo a course with both practical and theoretical elements to it.’

HMRC’s case

However, HMRC’s case was based on what looked like a solid line of authority and statutory interpretation. In order to claim the expenses, Dr Banerjee had to jump the hurdles of showing that they were incurred wholly and exclusively for her employment (they were clearly incurred necessarily) and also that they were incurred in the performance of the duties of that employment.

The legislation concerned was TA 1988, s 198 (the assessments in the case are now more than ten years old), but the same principles are of course at the heart of the current legislation.

HMRC’s first argument was that the expenditure was not incurred in the course of the duties of the employment.

The case of Brown v Bullock 40 TC 1 concerned a bank manager who was expected as part of his role to join a club and to entertain clients there (younger readers will need older ones to explain that bank managers used to take their valued clients out for lunch.

In fact, younger readers will need older ones to explain the now defunct concept of ‘bank managers’).

While it was not disputed that Mr Brown only incurred the expense of the club membership because of his employment, it was held that he was not performing the duties of a bank manager when he was entertaining at the club, even though the judge said that he was ‘no doubt adding to his usefulness as a bank manager’.

Doctor cases

Perhaps even more in point are two cases concerning doctors. In the case of Snowden v Charnock [2001] STC (SCD) 152, the appellant taxpayer was a doctor and a psychiatrist.

He could have practised psychotherapy relying just on those qualifications, but he wanted to get a specific qualification in psychotherapy. He therefore took up a specialist registrar post as a trainee in psychotherapy.

One specific condition of the post was that a trainee had to undergo a course of personal psychotherapy during the course of the appointment – ‘doctor, heal thyself’ in action.

The trust met 50% of the cost of the fees, and the trainee met the remaining 50%. Dr Snowden (which was a pseudonym in an anonymised decision) was claiming a deduction for the 50% that he had paid.

Dr Nuala Brice, as Special Commissioner, said that she had considerable sympathy for the taxpayer, but could not find that the expenses were allowable:

‘I find that the duties of the taxpayer were as a specialist registrar trainee. The personal psychotherapy sessions were for the purpose of enabling him to acquire his additional qualification in psychotherapy and were not in the performance of his duties. When he was undergoing the personal psychotherapy sessions, he was not performing the duties under his contract of employment. … [T]he nature of the job did not require the personal psychotherapy sessions which merely enabled the taxpayer to acquire the necessary qualifications to do the job or to do it better.’

Admittedly there were differences in this case and that of Dr Banerjee.

Dr Brice particularly highlighted the fact that it was not usual for the employer to pay the cost of these sessions, and that the timing of the sessions was left up to the student but with the proviso that they were not to be used as a reason for not fulfilling other requirements of the course.

However, the case of Decadt, already mentioned, was even more closely aligned with that of Banerjee.

Giving the High Court judgment in the latter case, Mr Justice Henderson had said that ‘I strongly suspect that a detailed examination of the full facts surrounding both their employments would show them to be indistinguishable’, and in the Court of Appeal in Banerjee, Lord Justice Rimer said:

‘I regard it as likely that a close comparison of the facts of Decadt and the present case will lead to the conclusion that Patten J’s decision [in Decadt] is irreconcilable with my own.’

Splitting the difference

So what is the difference between the two cases? Perhaps surprisingly it is not the original decision at the Commissioners, because both of them had won. It is probably relevant that in the High Court Dr Decadt, who was not represented, did not appear at all.

Dr Banerjee, by contrast, was represented by Julian Hickey (as a solicitor advocate) of Berwin Leighton Paisner, whose services had been provided pro bono, for which Mr Justice Henderson rightly expressed his gratitude.

The other main difference was that Dr Decadt was not claiming the costs of his course, which had presumably either been met by his employer or provided in-house. He was claiming the costs of entering the examinations, and of travelling to them and staying overnight.

The total came to just over £3,000 which may seem rather high, but it covered three examinations in different locations (one of them in Cork), and the examination fees made up five-sixths of the total.

In overturning the Commissioners’ decision in Decadt, Mr Justice Patten said that he was prepared to accept that the post imposed a requirement on Dr Decadt to undertake the training and to sit the examinations. However:

‘As Dr Brice indicated in her decision, the cases distinguish between time spent undergoing clearly relevant and perhaps on one view, necessary training, from time spent in actually carrying out the duties of the office or employment in question. The costs and expenses involved in undergoing training to qualify the taxpayer to carry out those duties are not themselves deductible.’

Performance of the duties

Before the Court of Appeal, the argument for the taxpayer concentrated on the nature of the contract, and therefore of the duties within it. Even though one judge, Lord Justice Pitchford, dissented from the majority verdict, he did not base his judgment on this point, and agreed that training could be part of the duties of the employment:

‘If the employer requires the taxpayer to spend four days working in a factory and the fifth day, at his own expense and on pain of dismissal, studying in a college, it seems to me unrealistic to deny that expenses necessarily incurred in performing his duty to attend college on the fifth day were incurred in fulfilment of an obligation of his employment.’

For all the judges, the key to distinguishing this case from previous authorities was that training formed a key part of what the employer was trying to achieve. It was not that the theoretical training was some sort of separate requirement unrelated to the ‘real’ work that she was doing in seeing patients.

It was more the other way round: the reason she needed to see patients was as part of the process of training her to be a consultant. It was the ‘practical’ which went with the theoretical training and which made up the whole training package.

Wholly and exclusively

That, however, was still not enough to dispose of the case. Not only had the expense to be incurred in the performance of her duties, it also had to be so incurred wholly and exclusively. HMRC’s argument was that there was an unavoidable element of personal benefit in taking these examinations, which breached this requirement.

This was the ground on which Lord Justice Pitchford found for HMRC. One of the conclusions of the Commissioners who heard the case was that:

‘The fact that the respondent would have been dismissed for failure to comply meant the fact that the expenditure was also for her professional development and advancement of her knowledge were (sic) of secondary importance.’

In his view, this meant the Commissioners had distinguished between a primary and secondary purpose, and not (as they should have done) between a purpose of any kind and an incidental but immaterial benefit which also accrued.

Giving the majority view, however, Lord Justice Rimer read the conclusion of the General Commissioners differently. He acknowledged that they had ‘perhaps inconsistently’ suggested that Dr Banerjee had a dual purpose, but that the better view of their conclusions was:

‘...no more than that the potential for future professional advancement that she derived from the courses was at most a secondary, or incidental, benefit of her expenditure.’

In fact, he found the whole argument unreal. The reason why Dr Banerjee attended the courses and took the examinations was that she was required to by the contract (and indeed that was the whole point of the training contract).

She would have been sacked if she had not done so. It was therefore artificial to separate out one part of what was intended all along to be a training contract and say that it was not part of the duties of the employment.

There is an alternative

So, not without difficulty, the Court of Appeal found on a majority verdict for the taxpayer. At which point it might be worth just looking at the obvious alternative way this contract could have been structured: namely for the hospital trusts to pay the costs of the training and examinations, and to reduce their salaries accordingly.

The obvious question is why this would not give rise to a charge on the employees as a benefit in kind. The provisions dealing with training are not the same for employers and employees.

If the employer provides ‘work-related training’ or pays for examination fees and other associated expenses, ITEPA 2003, s 250 prevents a charge to tax arising on what could otherwise be a benefit in kind.

ITEPA 2003, s 251 then defines work-related training as ‘a training course or other activity designed to instil, impart or reinforce any knowledge, skills or personal qualities’ which would help the employee to perform either the duties of the current employment or of any other he might realistically hold in due course.

The breadth of that rule can be seen in Silva v Charnock (SpC 332). The taxpayer had just finished an MBA course, and had the fees for it refunded by her new employer. It was held that this was not taxable, as it was reimbursing her for costs allowable under what is now ITEPA 2003, s 250.

While it might be argued that this particular case turned on wording which is no longer present in the rewritten legislation, if the taxpayer had been employed by the company before taking the MBA there seems to be no doubt that it would be allowable.

There is no obvious policy reason why the rules for employees getting a tax deduction when they are not reimbursed should be any different from the rules which apply when they are. T

he argument put forward is often that the employer’s willingness to make reimbursement indicates that the expense is genuine, but in these days of salary sacrifice for childcare vouchers, etc. that seems unrealistic.

Indeed, it suggests a way for all potential specialist registrars to be employed which would obviate the problem. Instead of engaging them directly, they should be employed by umbrella companies which then provide them as staff to the hospitals.

The umbrella company would receive the total salary (increased for secondary NIC), and would meet the cost of the training by reimbursing the doctor tax-free for the expenses incurred. The balance would be paid out as a net salary.

Do we really want tax law to force people to jump through hoops like this? Or would it not be better to ensure that expenditure which would not give rise to a benefit when incurred by the employer is also deductible when incurred by the employee?

Issue: 4268 / Categories: Comment & Analysis , Brown v Bullock , Decadt , Nuala Brice , Piu Banerjee , Silva v Charnock , Snowden v Charnock , Employees , Income Tax