If an employer provides an employee, director, or a member of an employee’s or director’s family or household with living accommodation, a benefit in kind can arise both in respect of the living accommodation itself and the associated benefits (such as utilities, furniture, and other services met by the employer).
However, in certain cases employees and employers can ‘benefit’ from exemptions to income tax, National Insurance Contributions (NIC), or related reporting obligations, where the provision of the living accommodation meets certain qualifying conditions.
HMRC recently announced a change to the current rules from April 2021, whereby the ‘representative occupier’ concession will be removed. HMRC have announced this change now in the hope it will allow both employers and employees who are affected time to make any appropriate changes needed ahead of April 2021. All the other rules around accommodation benefits remain the same at this time.
The relevant HMRC guidance within their Employment Income Manual is at EIM11336 onwards and has been updated.
What is the representative occupier concession?
The extra statutory concession is based on the rules which applied prior to the current tax rules for accommodation coming into force in 1977 and was based on the discussions in Parliament at the time as recorded in Hansard. These rules applied to what were called representative occupier posts which existed before 6 April 1977 and which continued to exist. The concession allows the accommodation to continue to be treated as exempt provided circumstances remain unchanged, and also applies to employees who succeed a post regarded as carrying representative occupier status.
A representative occupier is a post occupied by an employee who:
- resides in living accommodation provided rent-free by the employer (or by a third party by reason of the employment);
- as a condition of their contract of employment, is required to reside in that particular living accommodation and is not allowed to reside anywhere else; and
- occupies the house 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 effective performance of the duties.
Where the post met these criteria and had done for each year since 1977, then the concession allowed for the accommodation benefit to be provided tax and NIC free. Many organisations which have been around since before 1977, including boarding schools, may have agreements with HMRC that the exemption applies and covers particular posts or groups of employees.
What does this mean for employers?
This means that many more employees will be taxable on the benefit of accommodation provided by their employer from April 2021. It also means increased cost for the employer as Class 1A NIC will also be due.
Whilst many employers have been expecting a review of the tax and NIC treatment of accommodation since the call for evidence in 2016 and the previous OTS reports, this could not have come at a worse time. Many will also remember back then that there had been a recommendation to allow grandfathering provisions, but these grandfathering rules will not apply.
What statutory exemptions for accommodation are continuing?
The current statutory tax exemptions that will continue to apply cover situations where:
- the provision of accommodation is necessary for the proper performance of the employee’s duties (s99(1) ITEPA 2003 – EIM11341 onwards);
- the accommodation is provided for the better performance of the duties of the employment, and the employment is one where it is customary for employers to provide living accommodation for employees (s99(2) ITEPA 2003 – EIM11346 onwards); or
- there is a special threat to security and the employee resides in the accommodation as part of special security arrangements (s100 ITEPA 2003 – EIM11361 onwards).
For those employers in the higher/further education sector, HMRC issued instructions that from April 2019 they no longer accept that the customary exemption was appropriate to accommodation provided. Employers covered by this are likely to have already identified which exemptions apply to their employees as HMRC asked for confirmation by 30 April 2019.
How do employers value the accommodation benefit?
The rules for valuing living accommodation for benefit in kind purposes are often complex and can depend on a number of factors including:
- whether the property is owned or rented by the employer;
- its gross rateable value under the old system of rates; or
- whether it is considered an 'expensive' property for benefit purposes.
For example, where the property is owned the cost of the accommodation impacts the calculation of the taxable benefit. Where the cost is more than £75,000, this cost includes 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 based on the old rating value, plus an additional charge relating to the cost over £75,000.
So, to recap: the removal of the tax exemption for representative occupiers from 6 April 2021 could result in costly tax implications for employees, and costly NIC implications for employers.
What should employers do now?
Employers should urgently:
- identify which employees are covered by this concession;
- review if they might be covered by the statutory exemptions highlighted above;
- consider if they need to amend any contract terms; and
- communicate with employees.
How can we help?
This is an important change and will impact many employers in a range of sectors, but particularly those in education, agriculture, and faith/religion.