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KEY POINTS
- Exactly what is living accommodation?
- Representative occupiers and the other exemptions.
- Calculating the cost for pre-owned properties.
- Apportionments and anti-avoidance measures.
- The provision of other assets and expenses.
In her article ‘On the threshold’, Penny Bates provided a very useful overview of the rules relating to the tax charges that can arise when accommodation is provided for an employee by an employer or the ‘person involved in providing the accommodation’ to use the terminology of ITEPA 2003, s 112.
The aim of this article is, if you’ll excuse the pun, to build on Penny’s article and take a look at the edifice from some of its lesser known aspects.
What is living accommodation?
A good place to start is with a note as to what exactly is the ‘living accommodation’ that is subject to tax under ITEPA 2003, s 97 et seq?
HMRC’s Employment Income Manual at EIM11321 states that as there is no statutory definition of living accommodation it must given its everyday meaning; examples being houses, flats, houseboats, holiday villas and apartments.
HMRC go on to say that ‘by contrast, it does not cover accommodation in a hotel room, other forms of board and lodging and non-residential accommodation such as a workshop, garage or office. These items are all accommodation (other than living accommodation).
‘The Inland Revenue view is that living accommodation is something that gives the occupant the necessary facilities to live domestic life independently without reliance on others to supply basic needs. In practice we would be looking for an individual to at least have the use of a refrigerator and full cooking facilities, even if such facilities are shared’.
That is not to say that there would be no charge to tax on non-living accommodation, for example a garage or paddock, which would presumably be taxed under the residual charge of ITEPA 2003, Part 3 Ch 10. See the Employment Income Manual at EIM11322 and EIM21632.
Local authority accommodation
A relatively minor aside perhaps, but before ITEPA 2003 arrives at the main charging provisions, it states (s 98) that ‘this Chapter does not apply to living accommodation provided for an employee if:
(a) the employer is a local authority;
(b) it is provided for the employee by the authority; and
(c) the terms on which it is provided are no more favourable than those on which similar accommodation is provided by the authority for persons who are not their employees but whose circumstances are otherwise similar to those of the employee.’
This exemption may seem a little odd, but its purpose is to ensure that a council employee who happens to live in a council house or flat will not be subject to a benefit in kind charge if the rent paid is less than the market rent – assuming that the rent paid is the same as any other council tenant would pay.
Representative occupiers
In her article, Penny mentioned that ‘no benefit arises if the accommodation is provided in circumstances that mean it is “job-related accommodation”, which is sometimes called “representative accommodation”’.
She then moved on to consider the three exemptions from an accommodation benefit in kind charge that apply where the accommodation is provided:
(a) for the proper performance of the duties of the employment;
(b) because it is customary and for the better performance of the duties of employment; and
(c) because of security reasons.
However, from a reading of the Employment Income Manual at EIM11336 et seq it seems that HMRC look upon ‘representative occupiers’ as another separate category – effectively a fourth category of exemption – that applies where the circumstances of the employment have remained unchanged since April 1977. HMRC explain at EIM11336 et seq:
‘This exemption is not in the legislation. It was a practical measure introduced when the current living accommodation legislation started from 6 April 1977.’
A representative occupier is an employee:
- who resides in a house provided rent free by the employer; and
- who as a term of the contract of employment is required to reside in that particular house and is not allowed to reside anywhere else; and
- whose occupation of the house is for the purpose of the employer, the nature of the employment being such that the employee is reasonably required to reside in it for the better and more effectual performance of the duties.
I would imagine that many of the employments that fell within the representative occupation category would now fall within one of the two exemptions under s 99, but HMRC’s view may still be helpful in some instances.
Note that it is the circumstances of the employment position that must have remained unchanged since 1977, not the employee themselves!
Of course, because this exemption now dates back over 30 years there may be some practical difficulties as acknowledged by HMRC at EIM11338.
‘Records may no longer exist as to whether a particular post was a representative occupier post at 5 April 1977. In such a case you have to make a judgement based on the facts as to whether it is likely that the Inland Revenue would have accepted the post as a representative occupier post at that time.
When considering whether the circumstances remain unchanged you should decide if the continuing post would still meet the representative occupier test (see EIM11337). If it would then it is likely that the circumstances have remained unchanged as long as the duties of the post remain similar to those at 5 April 1977.’
‘Proper’ and ‘better’
In addition to ‘representative occupiers, on the first page of her article Penny mentioned the three main exemptions from the living accommodation tax charge; i.e. where the occupation is necessary for the ‘proper’ performance of the employee’s duties; necessary for the better performance where this is also customary; or where there is a security threat.
For practitioners looking for guidance as to the type of employee that might fall under one of the first two exemptions, HMRC provide guidance and lists in the Employment Income Manual at EIM11342 and EIM11351 respectively.
Directors
The exceptions from the living accommodation charge for an employee where:
(a) it is necessary to the performance of his duties that he should reside in the accommodation; or
(b) the accommodation is provided to an employee to enable him to perform his duties better and the employment is of a kind in the case of which it is customary for employers to provide living accommodation;
do not apply in the case of a director unless he has no material interest in the company and either he is a full-time working director or the company is non-profit-making or charitable.
‘Material interest’ is defined in ITEPA 2003, s 68 and will exist where one of two conditions is met. The first (‘condition A’ in s 68) is where the person, either alone or with his associates, is the beneficial owner of, or is able to control (directly or indirectly) more than 5% of the ordinary share capital.
Condition B applies in the case of a close company where the definition is extended to include any person, together with his associates, who would be entitled on a winding-up or in any other circumstances to receive more than 5% of the company’s assets available for distribution among the participators.
According to ITEPA 2003, s 67(3), ‘“full-time working director” means a director who is required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity’.
One hopes that if the taxpayer is the director of a number of associated companies, HMRC would look at these as a whole although there is no legal requirement to do this.
ITEPA 2003, s 99(4) confirms that ‘“non-profit-making” means that the company does not carry on a trade and its functions do not consist wholly or mainly in the holding of investments or other property’.
The Employment Income Manual at EIM20211 confirms that ‘a company which has been accepted as a charity by IR Trusts (Bootle) has been “established for charitable purposes only”’.
Practitioners should also bear in mind that the definition of a director includes anyone in accordance with whose instructions the directors are accustomed to act – so-called ‘shadow directors’ – unless this is simply advice given in a professional capacity, such as by the company’s tax adviser! The case of R v Allen [2001] STC 1537 is generally quoted as instructive reading on this point.
Working out the cost
Penny mentioned that the calculation of the taxable value of the benefit depends on whether the accommodation cost more or less than £75,000.
This formula for this calculation is A + I – P as contained in ITEPA 2003, s 104 as explained in her article.
If the result of the formula is £75,000 or less then ITEPA 2003, s 105 states that the benefit is calculated by reference to the ‘annual value’ or the rent paid whichever is greater. If the result exceeds £75,000 then to the s 105 benefit is added a charge under ITEPA 2003, s 106 of the excess multiplied by the official rate of interest.
A deduction can be made from that amount in respect of ‘any sum made good by the employee to the person at whose cost the accommodation is provided that is properly attributable to its provision’ or the ‘excess rent’ (see s 105(2)(b) and s 106(2)(b)).
The phrase ‘properly attributable to its provision’ should be noted. To qualify for a reduction under s 105(2), the employee’s contribution must be directly linked to the provision of the accommodation.
In Stones v Hall [1989] STC 138, the directors of a company provided interest-free loans to the company. The court held that the value of the loans could not be set against the value of free accommodation provided by the company because there was no evidence of an agreement linking the interest forgone on the loans with the provision of the accommodation.
Property already owned
The general rules for calculating the cost as outlined above will apply in most cases, but ITEPA 2003, s 107 contains a ‘special rule for calculating cost of providing accommodation’.
This applies where a person providing the accommodation has owned ‘an estate or interest in the property’ for a period of six or more years before the employee first occupies the property after 30 March 1983.
In such a case, the cost of providing the living accommodation for the purposes of calculating the additional yearly rent (i.e. the tax charge on properties costing more than £75,000) is calculated using the following formula:
MV + I – P
Where:
MV is the price which the property might reasonably be expected to have fetched on a sale in the open market with vacant possession as at the initial date; and
I is any expenditure incurred on improvements to the property which has been incurred during the period:
(a) beginning with the initial date; and
(b) ending with the day before the beginning of the tax year, by a person involved in providing the accommodation; and
P is – subject to conditions – any payment or payments made by the employee to a person involved in providing the accommodation.
The result of this formula takes the place of cost ‘C’ in the
ORI x (C - £75,000) formula in ‘Step 2’ of s 106(2).
It should be noted that the estate or interest or indeed the person owning the property do not have to have remained the same during the six-year period.
Anti-avoidance
Other than when an individual uses their own money to acquire a property abroad through a company for local tax purposes, it is probably relatively unusual that the employee contributes to the capital cost of the provision of the accommodation.
However, the Employment Income Manual does touch on one scenario where such a contribution may be used in an attempt to avoid tax and another where the level of rent is manipulated.
The first (mentioned at EIM11414) is where the property is co-owned by the employer and the employee as tenants in common through a trust.
The argument is that the tenant in common is entitled to use the whole of the property even though he owns a smaller interest and thus receives no benefit from the employer’s ownership. HMRC state that ‘there are arguments to support a benefit charge within ITEPA 2003, Part 3 Ch 5 and will look at the facts of any cases where this is argued’.
The second scenario is where an employer provides a property by taking a short lease, but paying a large lease premium rather than a higher rent and thus arguing that any benefit is restricted to the annual (i.e. rateable) value.
HMRC disagreed with this at EIM11415 – ‘in some circumstances we might wish to argue that the premium should be treated as rent’.
To combat this more clearly, FA 2009, s 71 inserted new s 105A into ITEPA 2003. This states that where the accommodation provider arranges for a property by way of a lease of ten years or less then any lease premium paid is treated as additional rent spread over the period of the lease and added to any other rent paid during the year.
Apportionments
One might think that if more than one employee has the use of a property, they might each face a full benefit in kind charge on the basis that they may have the use – although not exclusively – of the whole property.
This is not the case and ITEPA 2003, s 108 states that the total of the cash equivalents for all occupying employees is limited to the amount that would be chargeable if the property were only occupied by one employee. Section 108(2) states that the apportionment is to be made on a ‘just and reasonable’ basis.
Similarly, if an employee or employees only have use of the property for part of the year, then the tax charge will be proportionate. Remember that the charging sections refer to ‘the taxable period’ (s 102(2) which is the period for which accommodation is provided.
Apportionment or adjustments to the calculation of the benefit may be relevant in two other instances as summarised in the Employment Income Manual at EIM11501:
- Where the living accommodation is part of larger premises where there is a separate part clearly designed and used for business purposes; for example, a shop with flat above.
EIM11502 suggests that the cost or rent of the premises will need to be split on a reasonable basis if the living area does not have its own rating value.
HMRC do acknowledge that the commercial part of the premises will probably command a proportionately higher part of the rent, but they would not allow an apportionment by reference to the hypothetical expense that an employee might have occurred if they had lived elsewhere. See EIM11502.
- Where there is exclusive business use of part of the living accommodation. A deduction may be given under ITEPA 2003, s 364, e.g. by apportionment. See EIM11503. HMRC provide examples of various scenarios on this subject at EIM11504, EIM11505 and EIM11506.
Holiday accommodation
Following on from apportionments, what must be remembered is that it may not only be physical occupation during a taxable period that is relevant in calculating the tax charge and care should be taken where living accommodation is provided as holiday accommodation.
As HMRC state at EIM11421, ‘the meaning of provided can cause difficulties’. And this is illustrated by HMRC’s example reproduced in Example 1 (below).
The Employment Income Manual at EIM11422 goes on to consider the potential charge if the property was available for commercial letting and concludes that even if the property had not been fully let for the 48 weeks of the year when it was not occupied by the director and his family as in Example 1 (above), in those circumstances the tax charge could be restricted to the four-week period although the charge would be calculated by reference to the potential annual rent rather than for the actual weeks of use.
At EIM11423, HMRC goes on to consider the situation where the flat is purported to be available for commercial letting and for use by other employees, but this proves to have been minimal.
HMRC say that ‘this is a case where in practice we would seek to test whether what the employer was telling us was correct’.
Other assets and expenses
Finally, as intimated by Penny, the tax charge on accommodation rarely ends with the property itself and the employer may well pay other associated costs. The tax treatment of these will depend on whether the employer is meeting a liability of their own or the employee’s.
Looking at payment of the employer’s liability, such payment will only be subject to tax under ITEPA 2003, Part 3 Ch 10 – the ‘residual liability to charge’ – and this will not apply (see ITEPA 2003, s 216) to those earning at a rate of less than £8,500 per year. This will apply to expenses such as payment of the employer’s bills relating to the property and the provision of furniture and fittings.
Rather than being the subject of a separate benefit in kind charge, repairs to the property, etc. would affect the cost of the property in calculating the accommodation charge itself.
It should also be noted that whether these other benefits are subject to tax and National Insurance will depend on whether the accommodation itself is exempt from tax charge. If it is, the council tax, water and sewerage charges paid by the accommodation provider will be free of tax and NICs.
As far as costs such as furniture, heating, lighting and maintenance are concerned, if the accommodation is not taxable the reportable value is limited to 10% of the employee’s net earnings less any amount made good.
See ITEPA 2003, s 315. There is also an exemption from tax for clergymen in ITEPA 2003, s 290 and extra-statutory concession A61.
HMRC's note on living accommodation summarises reporting requirements and tax and National Insurance contribution liabilities here.
