Employee living accommodation – is it tax exempt?
HMRC are removing one exemption and are clamping down on another.
The tax treatment of employee living accommodation is complex. Some of the rules are very old and require information, from the 1970s, for example the 1973 Gross Rateable Value, for some calculations.
In broad terms, the living accommodation taxable benefit applies to the provision of a property, such as a house or flat, to an employee, rather than hotel accommodation. The provision of employee living accommodation is a taxable benefit unless it is covered by a job-related tax exemption. There have been proposals in recent years to simplify the calculations and restrict the availability of the exemptions – although nothing has changed, until now.
HMRC are of the opinion that some employers are claiming exemptions when they may not be due. Employers must be able to explain to HMRC, if challenged, why they consider an exemption applies. A number of exemptions are available, but the most commonly claimed are the following:
- The employee is a Representative Occupier;
- The employee is occupying the property as it is necessary for the proper performance of their duties; or
- The employee is occupying the property as it is customary and for the better performance of their duties.
HMRC are withdrawing the first of these exemptions, the Representative Occupier, from 6 April 2021. This is a very old exemption in respect of posts in existence before 6 April 1977 where the employee is required, as a condition of their contract of employment, to reside in that particular accommodation and is not allowed to reside anywhere else. In addition, given the nature of their employment they must reside in it for the better and more effective performance of their duties. It also applies to employees who succeed an employee who had representative status. The conditions are tightly drawn. Tracking occupation since 1977 is a challenge, especially in relation to employees who succeeded employees who were previously eligible.
The other two exemptions are both very subjective. Both parts of the customary and better performance exemption must be satisfied. In their December 2018 Employer Bulletin, HMRC reminded employers that the customary test cannot be met by simply looking at one employer. Employers must demonstrate that they have considered the position in relation to employees holding similar positions with other employers. HMRC are challenging the use of this exemption; for example, from 6 April 2019, they indicated they no longer accept that the customary exemption is available for employees within the Higher and Further Education Sector.
Given the above, it is likely that HMRC will increase their activity in this area. If they identify an error, they may go back six years with their liability calculation and also charge interest and potentially penalties. It is also important to remember that even where an exemption applies, there may be a benefit in relation to other liabilities, such as light and heat.
Employers must be able to demonstrate to HMRC that they have dealt with their employee accommodation correctly. We recommend that employers undertake regular reviews to identify:
- Accommodation provided to employees;
- The employees who occupy the accommodation;
- Why they occupy the accommodation and whether it is taxable or exempt; and
- If an exemption applies, which exemption applies and why (including the interaction with contractual requirements and job descriptions).
If you have any questions or have any concerns about how this might affect you, please contact Lee Muter, Employment Taxes Partner, on 07810 852 362 or at email@example.com or Paul Tucker, Employment Taxes Senior Manager, on firstname.lastname@example.org or 07392 870 199.
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