Historically a non-statutory exemption has applied in respect of employees who were provided with living accommodation and treated as representative occupiers on 5 April 1977. This has meant that accommodation has been exempt provided circumstances have remained unchanged since 5 April 1977. The exemption has also applied to employees who succeed to a particular post that carries representative occupier status.
This exemption is an Extra Statutory Concession (ESC) and is therefore not in the legislation. HMRC undertook a review of the position of all published ESC’s and concluded that ESCs did not meet the conditions set out for the collection and management of taxes and therefore would need to be added to the legislation or be withdrawn. Unfortunately this ESC is being withdrawn
Some education establishments have relied on this concession up until now. Sometimes the accommodation has been provided for historical reasons and the organisation may be unaware that they have been relying on this ESC.
Where the representative occupier ESC exemption has been relied on by employers, its withdrawal means that employers will have to consider whether the statutory exemptions can apply. This means that employers will have to carry out a detailed review to identify the areas of risk, consider if a statutory exemption will apply, agree this with HMRC if necessary and advise the affected employees in anticipation of the changes.
There are three potential statutory exemptions available.
1. No tax charge arises where the provision of the living accommodation is necessary for the proper performance of the duties of the employment, HMRC accept that the following workers usually satisfy this criteria:
2. Accommodation can also be considered exempt if it is provided for the customary and better performance of the employment.
For the exemption to be in place here, the accommodation must be provided for the better performance of duties of the employment and the employment is one for which it is customary for employers to provide living accommodation. As ‘customary’ is not defined in the legislation, a practice is customary if it is recognisable as the norm in that industry for accommodation to be provided for such roles. This is often a tough test to pass with HMRC.
3. No tax charge arises in respect of the provision of living accommodation where there is a special threat to the employee’s security, special security arrangements are in force and the employee resides in the accommodation as part of those arrangements. However it is rare that employees would qualify for this exemption. Employers will need to consider if any of the above conditions apply and will need to be able to justify why employees can be covered by the exemption.
For Boarding Schools, HMRC accept that bursars, headmasters, boarding house masters and mistresses, chaplains and the school matron/nurse, can be accepted as qualifying for exemption under S99(2) ITEPA (for customary and better performance of their duties). For other employees that don’t occupy one of those roles they will need to be able to demonstrate why they are exempt. This will be based on the actual duties of the role and the pastoral or out of hour duties and emergency call out duties actually undertaken.
Generally speaking, unless the accommodation provided meets one of the conditions for exemption outlined above, a tax liability arises.
The calculation of the benefit of the provision of the living accommodation depends on whether the cost of providing the accommodation is more than £75,000. The cost of the accommodation is the expenditure incurred in acquiring the interest in the property plus the cost of any improvements, less any contributions by the employee. The chargeable benefit is then determined on the basis of rating value, rent paid plus an additional charge relating to cost for accommodation costing more than £75,000.
Employers should review all accommodation provided to staff to ensure that it can be covered by one of the current statutory exemptions. This is particularly important when establishments have previously relied on the representative occupation extra statutory concession. Where accommodation is not covered under one of these exemptions, now is the time to consider future reporting requirements, employee engagement, and whether contracts and arrangements need to be changed prior to the new rules being implemented in April 2021.
Ancillary benefits such as council tax and utilities provided should also be reviewed in these cases to determine the correct tax position.
As employers have just 12 months to review and potentially change their arrangements before the rules change, we would recommend that a review carried out as soon as practically possible to give enough time to identify and plan for any necessary changes and communicate with affected employees.
We can assist in a review of the current accommodation provided, the roles undertaken by the occupants and the current tax treatment to determine any risk areas and comment on any recommendations for additional work.
We have significant experience in dealing with these issues and in the first instance we would recommend getting in contact with your usual Crowe contact or Robin Newman, Senior Employment Taxes Manager in our Employers Advisory Group on 0118 334 6642.