The tax rules for providing employees with accommodation are about to become less accommodating…

Tue 26 Feb 2019

The provision of accommodation to certain employees can be a benefit in kind that “benefits” from being free from any income tax, National Insurance (NIC) or related reporting obligations where it meets certain qualifying conditions.

However, from 6 April 2019, a change has been quietly announced (initially within the December 2018 Employer Bulletin) that could bring an unexpected income tax and NIC charge and related reporting obligation for employees and employers alike, particularly within the Further and Higher Education Sector. In this sector, we have become aware of a specific targeted paper that has been published to confirm this. However, this announcement will also impact other sectors too. This is explained in a little more detail below.

The background and current technical position

The general taxation principles and exemption can be found in the Income Tax (Earnings and Pensions) Act (ITEPA) 2003. Two provisions may exempt employer- provided accommodation; referred to as the ‘Necessary for Proper Performance’ and ‘Customary and Better Performance Tests’.

There is also a third, rarer condition that can provide an exemption from income tax and NIC charge for employer provided accommodation benefit. This is known as the “representative occupier” test and is based on whether HMRC would consider the occupation to be required by their duties of employment to reside in a property for the purposes of their employment, and that HMRC would have had this understanding in 1977 when this was first brought into being. As you can appreciate, this will take some analysis and review given its historical context.

Below we summarise the current main two tests in the UK:

1.      Necessary for Proper Performance

This is more onerous as it must be proved that the occupation of that specific property (as opposed to any other property) is essential to the role of the employee. HMRC accept certain categories of employees as meeting this criteria such as managers of camping and caravan sites living on or adjacent to the site or caretakers living on the premises and have full time caretaking duties and are on call outside normal working hours.

2.      Customary and Better Performance

Although this appears more flexible, HMRC tend to apply the rules strictly. There are two parts to this test and both must be satisfied in order to qualify for the exemption.

‘Customary’ is not defined in legislation; so takes its ordinary everyday meaning. The practice of providing accommodation must be customary in that kind of employment generally rather than in that employment with that particular employer. HMRC’s interpretation of customary is based on the Vertigan v Brady tax case.

Broadly the rule of thumb is that a practice is only customary if it is normal practice and failure to observe is exceptional in the industry or sector as a whole.

Even if the customary test is met, the better performance test also has to be met. Broadly to satisfy this requirement, the employee must show that by occupying the accommodation, they can perform their duties better than if they lived anywhere else.

HMRC publishes a list of classes of employees that they accept as meeting both criteria. It is often important to consider this more fully, particularly as job roles and requirements change due to technology, environment and demand.

What is changing?

HMRC has issued clarification stating that it will no longer accept that the customary exemption is appropriate to accommodation provided by employers from 6 April 2019, unless it can be shown to be customary in the sector (i.e. more than 50%).

HMRC has then issued a further specific note targeted at those within the Higher and Further Education sectors. This is due to HMRC considering that less than half of employees in the Higher and Further Education sector are provided with accommodation. This is likely to create a major area to review for universities and colleges etc where certain roles (e.g. Vice Chancellor) have been used to receiving accommodation benefit without a charge to income tax or NIC. However, it will be important to establish if the Representative Occupier rules may then apply and how this may be challenged by reference to specific roles etc and what is then customary within that role.

It is important to be clear that this is not updated legislation but HMRC ‘reminding’ employers of their approach to the guidance available and the legislation. There is however likely to be key aspects to review and consider where HMRC challenges the income tax/NIC treatment of the accommodation benefit to enable a defence.

HMRC has sent letters to those affected in the Higher and Further Education sectors and has sought confirmation that they have either amended their internal guidance or the new rules do not apply to them. This confirmation needs to be sent to HMRC by 30 April 2019. No targeted letters have been sent to other sectors to date, although this does appear to be an area HMRC will have a renewed focus on in the 2019-20 tax year.

How can Mazars help?

This is an important change and will impact a large number of employers in a range of sectors, but particularly those in education. Other sectors are likely to include faith / religion, catering, retail and hospitality.

We would be happy to help you understand this further and support you with reviewing in more detail and to help those in the Higher and Further Education sectors with preparing their response in time for 30 April 2019. Please do get in touch with Mazars to discuss by contacting:

• Vaneeta Khurana, Partner Vaneeta.khurana@mazars.co.uk (07881 283643)
• Ian Goodwin, Director ian.goodwin@mazars.co.uk (07387 242166)
• Dinesh Pancholi, Senior Manager dinesh.pancholi@mazars.co.uk (0777 1344266)