Replies to Queries - 3 - Bed and board

I have husband and wife clients who run a restaurant as a partnership. The restaurant is in a country location and they find it difficult to attract staff. They think it would help if they could offer accommodation and are therefore looking to buy a house, preferably a mile or two from the restaurant. This would provide accommodation for three or four waitresses and cooks.

Would the house count as a business asset for taper relief purposes:

Would interest and repair costs, other than initial repair costs, be allowed against the restaurant profit? If the members of staff lived there rent free, would they be assessed for a benefit, or would there be no benefit on the grounds that it is customary for restaurant employees to be provided with living accommodation?

If the clients went ahead with this plan, it would be necessary to provide a cheap (very cheap) car for staff to get between the house and the restaurant. Would this qualify as a pool car chargeable against the restaurant profit with no benefit to be assessed on employees?

(Query T16,026) - JWP.

Business asset taper relief applies to all partnership assets used for the purposes of the trade as opposed to for some private or investment reason. The clients are finding it very hard to recruit staff due to their location, which is having a negative effect on their business. In order to secure and improve the trade, they therefore plan to purchase a property to house staff who would otherwise find it too expensive or difficult to live nearby. It seems clear that the purpose of the purchase is to benefit the trade and as a result business asset taper relief should be available. If no rent is charged, then the taper relief position is strong, as the provision of the accommodation is a part of the cost of employment of the staff. If rent is charged, the position is weakened and the question of whether it is an investment starts to arise, although probably not unless a full market rent is being charged. If they retain the property for a number of years and use it only for staff accommodation, the position will be strengthened on an eventual sale. If, however, the property is let to third parties, the Inland Revenue is likely to challenge a claim for business taper relief. If the property is only held for a short period, there is the risk that any gain will be treated as an income profit under section 776, Taxes Act 1988.

For the same reasons that business taper relief should be available, the interest, repairs and other ongoing costs should be allowable deductions. If the property is actually an investment property generating income, then the deduction would be from the rents; otherwise it would be from the partnership profits.

Although there is a trade motive for the provision of the accommodation, this does not mean that no benefit in kind is assessable on the employees. In order to avoid the benefit in kind, one of the following conditions must be met:

Clearly the third cannot apply. The first cannot apply either because not every waitress would need to stay in accommodation to perform the services: to date they have not been provided with accommodation. This therefore only leaves the second of the three conditions. The facts seem similar to those in Vertigan v Brady [1988] STC 99 in which a nursery foreman was provided with accommodation because he could not afford to obtain it himself. The accommodation was three miles from the nursery. It was held that whilst it did help the better performance of his duties (as he was on call), it was not customary even though two thirds of nurserymen did live in employer provided accommodation.

Whilst it may be customary for staff in hotels to be provided with accommodation, it is not the case with restaurants. In a hotel, waitresses will often work at breakfast, lunch and dinner. In a restaurant, however, shifts will normally exclude breakfast. There is perhaps therefore less of a requirement to be on the premises. In a hotel, the staff will live on the premises either in the main building or in a separate block in the grounds, and not a mile or two away. It is, therefore, most unlikely that the accommodation will not be treated as a taxable benefit on the employees.

Again, the reason for the provision of the car is wholly and exclusively for the purposes of the trade and so there is no reason why the running expenses will not be deductible from profits. It will not, however, qualify as a pool car, as it will be stored overnight at the home of the employees. Even if the accommodation is job-related accommodation, it is unlikely that it will be possible to demonstrate that the duties of the waitresses commence in the house. Accordingly the travel to and from the restaurant will be private travel and generate a benefit in kind on the car. The benefit may be split amongst the employees under Extra-statutory Concession A71. - Wentworth.

The rules under section 145(1), Taxes Act 1988 are that if an employee is provided with living accommodation by reason of his employment, he is assessable to a benefit in kind under Schedule E in respect of the value of that accommodation, for the period concerned. Of course with all minuses there are pluses (or vice versa) and under section 145(4) exemptions from this charge would apply:

Based on cases of law, the rules in determining whether occupation of a specific property qualifies for exemption from a charge to tax are very strict. This is covered in the Revenue's Schedule E Manual at paragraph SE11341:

'There is an exemption from the provided living accommodation charge where an employee can show that it is necessary for the proper performance of the duties that he should reside in the accommodation provided …

'The test is only satisfied where the employee can demonstrate that occupation of the particular property (as opposed to any other property) is essential to the proper performance of the duties of the employment. Support for this view can be derived from Langley and Others v Appleby 53 TC 21. In this case the judge said if it is asserted that it is essential for the servant to occupy the house in order to perform his duties, it seems to me that the servant must establish affirmatively that for the performance of his duties he must live in "that house and no other". The words "that house and no other" emphasise the strict nature of the test.

'An employee may claim it is necessary to occupy a particular residence because the employer requires the employee to live there. This is not enough to satisfy the test. It must be shown that the duties of the employment require occupation of the residence. An argument that the employee cannot afford to live elsewhere is not sufficient - see Vertigan v Brady …'

Based on previous experience it is not thought customary for restaurant employees to be provided with living accommodation and so in this case if staff can be attracted, they would be assessable to benefits in kind. There would also be a benefit in respect of any repair costs made. However, if these and the interest costs would be allowable expenses for the restaurant depends on whether they actually qualify as business expenses, which looks pretty doubtful.

Under paragraph 5 of Schedule A1 to the Taxation of Chargeable Gains Act 1992 the point to ponder is whether the house would qualify as being used for the purposes of trade. So therefore the query on whether the house would count as a business asset for taper relief purposes if rented to the staff rent free or not, would have no bearing on this.

The qualifying rules for a staff car to be treated as a pool car are:

All of these conditions must be satisfied for the car to qualify as a pool car.

Normally taking a car home, whether at day or night time, would be counted as private use. In this case it could hardly be argued that work starts anywhere other than at the restaurant. Therefore even though more than one employee would use the car, the private usage would scupper the proposed intentions. Also, and this would have no bearing on the matter, because of the non-favourable status of the living accommodation, any car provided would normally have to be kept away from this site overnight. One possible solution to this might involve the husband and wife restaurateurs acting as chauffeurs to the employees. - N.K.

Extract from reply by 'Bear':

The main question concerns the Schedule E charge imposed by section 145(4), Taxes Act 1988. Assuming that the employers bear any tax charge, it would be less costly to provide the accommodation rent free rather than to pay extra remuneration tax free to enable the staff to meet the rent which is itself taxable on the employers.

There is no applicable tax-free mechanism for assisting staff to come to their permanent workplace except through provision of a works bus large enough to seat 12 (or a minibus seating 9, 10 or 11) - although only as few as a single employee need be carried. Such a vehicle would attract capital allowances and relief for running expenses. Use of a car would trigger benefit charges for 'commuting'.

Editorial note. Another reply on this subject included the suggestion, with regard to the vehicle, that using a van might result in a lower benefit in kind.

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