EIM50065 - Airline pilots: payment of training costs: Milsom & Hinsley v HMRC (SpC569)
The training which airlines provide for their pilots is “work-related training” which does not give rise to a taxable benefit because of the exemption in Section 250 ITEPA 2003 (see EIM01200 onwards). However, most airlines require their pilots to make a contribution to their training costs. That contribution does not necessarily qualify for tax relief.
Some airlines only require a contribution if the pilot leaves the employment within a specified period (usually three years). This is often referred to as a “training bond”. The way the arrangement is structured can have a significant effect on the pilot’s income tax position.
In Milsom & Hinsley v HMRC (SpC569), two pilots who worked for different airlines both received training at their employer’s expense. They were both required to give an undertaking that, if they left the employment within three years, they would repay a proportion of their employer’s training costs. They both did leave within three years, and had to make a payment. The Special Commissioner agreed with HMRC that those payments did not qualify for relief under Section 336 ITEPA 2003 (the general rule for employees’ expenses – see EIM31600 onwards). It was not an expense that each and every pilot employed by those airlines would have to pay. Mr Milsom and Mr Hinsley were required to pay only because of their individual decisions to end their employment within three years. In addition, the training had not been undertaken “in the performance of the duties” of their employment. It was undertaken to qualify them to perform those duties (see generally EIM32520 onwards).
Some airlines pay their new pilots a reduced salary until they have “paid off” their training costs. In that case, the pilot can only be taxed on the pay that he or she is contractually entitled to receive. There is no basis on which HMRC can require them to pay tax on any higher figure.
It may happen that a pilot who has been employed on the terms described in the previous paragraph will leave the airline before they have “paid off” all their training costs. The employer may require them to repay the balance in a lump sum. The lump sum does not qualify for relief under Section 336 for the same reasons as in the Milsom and Hinsley cases.