The concession for staff historically provided with living accommodation as ‘Representative Occupiers’ is being withdrawn from 6 April 2021.
Historically, HMRC operated a non-statutory exemption in respect of employees who were provided with living accommodation for “the better and more effectual performance of their duties”. Where this occurred, employees were treated as 'representative occupiers' and were exempt from tax on the provision of the accommodation. When the statutory exemptions for employer provided accommodation were introduced from 6 April 1977, HMRC retained the representative occupier exemption where it applied to existing posts at that date.
This meant that posts covered by the concession on 5 April 1977 remained exempt, provided the nature of the employment and provision of the property remained unchanged since 6 April 1977 and provided no rent was charged to the occupier. The exemption continued to apply to employees who succeeded to a particular post or posts that carried 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set out for the collection and management of taxes and therefore would need to be added to the legislation or be withdrawn. Unfortunately this ESC is being withdrawn with effect from 6 April 2021.
Some education establishments providing accommodation to staff have relied on this concessional treatment up until now. They can continue to rely on this until April 2021 provided they still satisfy the conditions for the ESC.
In some instances, organisations may be unaware that they have been relying on this ESC. Often this has been agreed with HMRC quite some time ago but the historical agreement has been 'lost' or forgotten over time. Often organisations simply do not consider why accommodation has been treated as exempt for tax purposes but follow previous years’ treatment or accept that a blanket exemption applies.
There are still three potential statutory exemptions that may cover staff living in employer provided accommodation:
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 relevant exemption.
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 ESC, or indeed if a review has not been undertaken for some time and circumstances may have changed. Where accommodation is not covered by one of the statutory exemptions, now is the time to consider future reporting requirements, tax implications, employee engagement, and whether contracts and arrangements need to be changed prior to the change 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 fewer than six months to review and potentially change their arrangements before the ESC is withdrawn, we would recommend that a review is carried out as soon as practically possible to give enough time to identify and plan for any necessary changes and communicate with affected employees.
Firstly we have found a number of schools that have effectively, copied the tax treatment from previous years on the basis of time and therefore not considered which exemption is currently covering the accommodation provided to staff. Therefore they may be unaware as to whether they are covered by representative occupier rules or by one of the statutory exemptions or a mixture of the two.
Some schools that have previously benefitted from offering wholly exempt accommodation, particularly those covered by the representative occupier ESC, are finding it difficult to ascertain certain important information. This includes the date and cost of acquisition of properties, gross rateable values (GRV) or market value (where appropriate), for each property owned. These details are helpful in calculating future benefits where exemptions will no longer apply. The details also allow schools to factor in the possible increased tax and National Insurance Contribution (NIC) charges to any overall review of accommodation.
At present, the calculation of accommodation benefits in kind, where no exemption applies, is complex. It depends on whether the cost, including any capital improvements, is less than or more than £75,000. As mentioned, some schools are having difficulty in obtaining details of the cost of their properties when purchased, particularly where the accommodation was purchased many years ago and where they may have carried out subsequent capital improvements.
We have also discovered that some organisations are struggling to ascertain market values from the time an employee moved into a property. This is important as the calculations may need to be updated for each successive occupier of the property where exemptions do not apply or where the benefit in kind after 5 April 2021 becomes taxable.
In addition some are understandably miscalculating the complex accommodation benefits. Perhaps seeking worked examples of the benefit in kind for a property below and above £75,000 would help schools understand how the calculations are carried out.
There are some schools reviewing wider concerns regarding the provision of accommodation to employees and the tax implications are only one, albeit important, part of these reviews.
For day schools where they are not sure whether any staff can be covered under any exemptions, it is important to review accommodation provided and currently claimed as exempt. We have seen exemptions agreed by HMRC for head teachers in certain specific circumstances and for caretakers living on or near to the school premises where the role includes the security or emergency call out responsibilities for the premises. It is unusual for HMRC to consider other roles as qualifying for exemption from accommodation benefits but there may be exceptions when individual cases have been agreed with HMRC. The position is not the same as for boarding school roles.
It is possible that some exemptions fall within the representative occupier category and were in place before 1977 when the rules were much less exacting. It is important that these are reviewed before April 2021 to establish whether any exemptions can be justified going forward.
For boarding schools, HMRC normally 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 considered exempt. This will be based on the actual contractual duties of the role together with the pastoral or out of hours/weekend duties and emergency call out duties actually undertaken. This is subjective and HMRC do not provide any published guidance for this.
Generally speaking, unless the accommodation provided meets one of the conditions for exemption outlined above, a tax liability arises.
The cost of the accommodation is the expenditure incurred in acquiring the interest in the property plus the cost of any capital improvements, less any capital contributions made by the employee.
The chargeable benefit is based only on the GRV for properties costing less than £75,000.
For properties costing more than £75,000, it is the GRV plus an additional charge based on the excess of the cost or market value over £75,000, depending on the time the property was first occupied by the current occupier.
Where properties provided by the employer are rented from third parties, the assessable benefit in kind, where chargeable, is the cost of providing the accommodation, i.e. usually the rent paid by the employer.
The calculations depend on many variables and can become very complex particularly where market values have to be considered.
Schools should consult with their tax advisers where they have particular issues or where they need to review their accommodation benefits in light of the change in April 2021.
For more information, contact Caroline Harwood or your usual Crowe contact. Visit our dedicated page for schools to find out how we can help you.