HMRC very recently changed its approach to taxing workers who receive living accommodation as representative occupiers as part of their jobs. We asked our in-house tax barrister, Sarah Woodall for information about the change, and what it will mean in practice for many in the education sector.
The law on living accommodation covers all employees. Expressed simply, the law charges employees’ tax on the difference between the value of accommodation to them and any rent he or she pays. In particular, a tax charge arises where living accommodation is provided by reason of employment:
- rent free
- at a rent less than the rent paid by the person providing it
- at a rent less than the amount chargeable.
Living accommodation takes its everyday meaning, and HMRC’s view is that something that gives the occupant facilities to live a domestic life independently, without reliance on others for basic needs, amounts to living accommodation.
Examples of living accommodation are houses, flats, houseboats, holiday apartments. But examples of things which are not living accommodation include accommodation in a hotel room, other forms of board and lodging and non-residential accommodation.
The representative occupier exemption
Until 6 April 2021, an extra statutory concession (ESC) was available for representative occupiers for posts which existed before 6 April 1977. As an ESC, this was not provided for by the law and a representative occupier is an employee:
- who lives in a house provided rent free by the employer
- who, per their contract of employment, is required to live in that particular house and is not allowed to reside anywhere else
- 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.
Withdrawal of the extra statutory concession (ESC)
Following the case of Wilkinson, HMRC undertook a review of all ESCs and unfortunately, HMRC found the concession for representative occupiers did not meet the relevant tests, and it was withdrawn on 6 April 2021.
Very many employers are reliant on the exemption, particularly for staff undertaking household or domestic duties, in boarding schools, on estates or who work in an agricultural, farm businesses where their work frequently requires them to work out of hours and where the position has existed prior to 1977.
But it is not all bad news and it is important to consider that the law itself provides some statutory exemptions that will be available in many cases, including:
- the ‘necessary for the proper performance’ exemption
- the ‘customary and better performance’ exemption
- the special security exemption.
This all means, and HMRC itself acknowledges, that many such employees are likely to fall within the ‘necessary for the proper performance’ exception provided for in the law. These statutory exemptions have been tested in the courts and key cases serve to illustrate that each case must be considered closely and on its own facts. For example, in the cases of:
- Tennant v Smith, which concerned the provision of living accommodation to a bank manager; he was given a portion of the premises for a home and was required to live in the building as servant of the bank, and for the proper purpose of performing his duties. In these circumstances, it was held that the value of the living accommodation was not chargeable to income tax.
- Reed v Cattermole, which concerned the provision of living accommodation to a church minister. Under the terms of his appointment, he was required to live for the purposes of his work in a manse provided rent free and he was not allowed to sub-let. The superior authority bore the cost of furnishing, decoration and repairs of the manse, and paid the local rates, water rate and income tax. The court found this too was not beneficial occupation and the tax, local rates and water rate should be excluded from his tax assessment as a self-employed person.
In any case of uncertainty, employers would be well advised to consult with HMRC on an employee’s possible entitlement to existing statutory exemptions in cases where the extra statutory concession is being withdrawn, or to take appropriate expert advice.
Employers and employees affected by the ESC’s withdrawal should also consider the scope to make appropriate contractual arrangements. It is also important to remember that, if other costs are paid in connection with accommodation, such as council tax and utilities, the tax treatment of these payments should be reviewed.