The Upper Tribunal has dismissed HMRC’s appeal in The Commissioners for HMRC v British Airways PLC [2026] UKUT 366 (TCC). The facts look aviation-specific — hotel rooms at Heathrow for cabin crew on back-to-back transatlantic rotations — but the machinery is one every CFO who books living accommodation, rest hotels, standby rooms or “home-base” overnight stays already runs: is this a taxable benefit in kind with Class 1A NICs attached, or a deductible travel expense that never becomes earnings?
BA won. Mr Justice Rajah and Judge Ashley Greenbank held that the cost of the LHR accommodation was deductible under section 337 ITEPA 2003 — travel expenses necessarily incurred on travelling in the performance of the duties of the employment. Once that deduction is available, section 289D ITEPA and the parallel Class 1A structure mean the benefit does not stick as taxable general earnings. Roughly £5.78 million of income tax and NIC exposure across 6 April 2016 to 5 April 2020 falls away under the parties’ sample-decision agreement.
If you still treat every UK overnight near a permanent base as “obviously a BIK,” rewrite the file. Full text: National Archives judgment. Practitioner notes: Claritax and City A.M.. HMRC says it is “carefully considering” the judgment.
What actually happened
BA cabin crew on certain long-haul patterns flew “back-to-back” (B2B) rotations through London Heathrow: outbound, overseas layover, return into LHR, then a second outbound after a short UK rest before the rotation finally ended. From February 2016, EASA Flight Time Limitations made the LHR rest arrangement mandatory for the second leg. BA provided the hotel. Crew were directed to use it. Compliance was monitored. They were not free to “go home” until the rotation completed.
For earlier years BA had accepted BIK treatment when use of the rooms was not compulsory. After the regulatory shift, BA argued the stay was part of performing the job, so a matching deduction under Chapter 2 of Part 5 ITEPA cancelled the benefits-code charge. HMRC disagreed and treated the rooms as earnings for Class 1A under section 10 SSCBA 1992.
The dispute was crystallised through a February 2022 contractual settlement: sample Class 1A decisions of £555,916.92 for 2018/19, with the appeal outcome governing tax and NIC treatment across the four-year window. The First-tier Tribunal allowed BA’s appeal on 3 April 2025 on s337, with s338 and s336 as alternatives. HMRC appealed with FTT permission. Judgment: 28 September 2026.
The legal engine
Living accommodation sits in the benefits code — see section 102 ITEPA. BA did not pursue a freestanding section 99 exemption before the UT. The live question was whether an equivalent amount would have been deductible under Chapter 2 of Part 5 if the employee had paid for the room themselves. If yes, section 289D stops the benefits-code charge. Class 1A follows the same general-earnings map.
Three deduction gateways were pleaded: section 337 (travel in the performance of duties), section 338 (necessary attendance, excluding ordinary commuting — definitions in section 339), and the general section 336 wholly/exclusively/necessarily rule. HMRC accepted obligation-to-incur and “travel expense” status. The fight was on duties, “on travelling” and necessity. The UT decided the case entirely on s337. HMRC’s manuals already treat accommodation as capable of riding with travel expenses where the journey rules are met — see EIM31815, EIM31803 and EIM32351.
Why HMRC’s three s337 grounds failed
Ground 1 — duties. The obligation to stay was not collateral, personal or merely preparatory. It was one of the duties. There was “no relevant distinction” between LHR accommodation and overseas hotel stays on the same rotation: in both cases crew cannot go home because the job requires them to be somewhere else. Regulatory labels that split “rest” from “flight duty” for aviation safety did not dictate the tax meaning of employment duties.
Ground 2 — “on travelling.” Whether crew are travelling for s337 is a question of underlying fact, not EASA taxonomy. When crew are rostered on a B2B rotation, the entire rotation is the job and the journey. The journey does not end at a New York stopover or an LHR stopover. Job and journey end only when the rotation completes and crew are free from all duties.
Ground 3 — “necessarily incurred.” Once the obligation to stay became a duty of that employment — framed by BA’s commercial and regulatory operating model — the expense of performing that duty was necessarily incurred. HMRC cannot recharacterise mandatory operational rest as private living just because the rest hotel sits near a home base the employee might theoretically reach on a different roster.
Why CFOs outside aviation still care
- Transport, logistics, offshore, emergency services, construction camps and multi-site operators that book UK overnight rooms close to a permanent workplace because the shift pattern requires it.
- PE diligence on employers with large Class 1A accommodation or “duty hotel” lines, especially where treatment flipped after a safety or working-time rule change.
- Audit committees sitting on open employer NIC decisions that assume “UK base = always taxable.”
- Payroll design heading into mandatory BIK payrolling from April 2027: wrong characterisation today becomes wrong RTI deduction tomorrow.
- Mobility stacks that already struggle with short-term business visitors — see HMRC’s GfC19.
BA is not a free pass for every hotel near head office. Ordinary commuting and private travel remain excluded under s338. Optional rooms and non-duty layover choices still look like benefits. The win turns on mandatory, monitored, rotation-bound rest that is part of doing the job.
What every CFO must lock now
1. Duties map, not hotel invoice — For every employer overnight, record roster obligation, compulsion, whether the employee is free to go home, monitoring, and when the rotation actually ends.
2. Pre- and post-rule-change split — BA accepted BIK treatment before EASA FTL made the stay mandatory. If your file still uses a pre-change policy after a working-time rewrite, you are fighting yesterday’s case.
3. Home-base proximity is not destiny — Distance to the employee’s house is a fact, not a legal kill-switch. Document why home is unavailable while still under direction.
4. Class 1A and settlement architecture — Sample decisions and “outcome binds the years” deals are common on large employer NIC files. Know what your settlement locks before you celebrate or provision.
5. Benefits-code starting point stays — Win through matching deduction, not by pretending living accommodation left the benefits code. Keep the EIM living accommodation and travel chapters in the pack.
6. s337 vs s338 discipline — Do not plead commuting exceptions if your real case is that the journey never ended. BA shows s337 can carry the whole load when the rotation is the journey.
7. Payroll readiness — Align tax flags and Class 1A feeds with the legal analysis before April 2027 mandatory payrolling expands real-time exposure. See HMRC’s draft BIK RTI prep hub and expenses and benefits guidance.
8. Do not over-read the win — Optional hotels, non-monitored rest and pure commuting substitutes remain high risk. Drop the judgment into the risk pack this week; re-paper open Class 1A enquiries that assumed “UK base hotel = taxable” without a duties analysis; and force reward, rostering and payroll onto one narrative.
Bottom line
BA is a duties-and-journey win, not a slogan that every staff hotel escapes tax. The Upper Tribunal dismissed HMRC’s appeal because mandatory Heathrow rest during an open back-to-back rotation was travel in the performance of employment duties under section 337 ITEPA. The matching deduction prevented the benefits-code amount from sticking as taxable general earnings, and roughly £5.78 million of income tax and NIC exposure fell away under the sample-decision framework.
CFOs should lock three things before the next board cycle: a rotation-level duties map for every employer overnight, evidence of compulsion and monitoring after any working-time or safety rule change, and payroll/Class 1A coding that follows the legal analysis rather than a lazy “near base = BIK” rule of thumb. Ops can still put crew in a room to keep the network safe. Finance has to know whether the statute treats that room as part of the journey — or as pay in kind.
Mark Hendy is a PE-facing CFO and tax agent through Tanous Limited. This note is general information, not advice on your specific employment-tax position.