We are seeing increased numbers of employers being caught out by missing or incorrectly reporting employee living accommodation benefits. This continues to be an area of HMRC focus and employers should take care to ensure that they are correctly identifying these benefits, properly applying the rules, and reporting such benefits to HMRC.
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).
Sometimes, and normally in exceptional circumstances, no benefit in kind arises including (but not limited to) occasions where occupation of the property is necessary for the proper performance of the employee’s duties of employment, or where it is customary for employees to be provided with living accommodation for the better performance of their duties, or where occupation is attributable to the employee’s attendance at a temporary workplace.
Where a benefit in kind does arise, the employee will normally pay tax on the benefit at their marginal tax rate, and the employer will pay Class 1A employer National Insurance Contributions (NIC).
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.
As a result, there are a number of potential complexities and pitfalls for employers to deal with and navigate. Where employers make innocent mistakes and under-report the benefit in kind arising, this can often lead to significant and unexpected liabilities, including grossed-up tax and NIC liabilities going back six tax years, together with HMRC interest charges and penalties.
What should employers do?
All employers should take special care to review the treatment of living accommodation made available to employees and directors (including members of their families or households) to ensure that the correct employment tax and NIC treatment is being applied.
In particular employers should consider the following questions:
- Does an Optional Remuneration Arrangement in place in respect of the living accommodation change the way the property should be valued for benefit purposes?
- If the living accommodation is being treated as non-taxable, is this is correct and would this position be accepted by HMRC? Furthermore, do arguments which support the exempt status of the living accommodation create wider issues, especially around National Minimum Wage and National Living Wage compliance?
- If HMRC challenged the position taken regarding living accommodation benefits, and contended that tax and NIC had been underpaid, could 'reasonable care' be demonstrated to mitigate the final liabilities payable to HMRC?
- Whether the living accommodation benefit should be based on availability or actual use of the property? We regularly see living accommodation benefits being incorrectly reduced for periods when the property is not used, but is still available for use.
- Has the benefit arising been valued in in the correct way, especially where the living accommodation is 'expensive' or where the living accommodation itself forms part of a larger property which is used for other purposes?
- Have all associated costs connected with the living accommodation been identified, considered, and reported to HMRC?
If you have any questions about the employment tax and NIC treatment of living accommodation, or any concerns about living accommodation benefits you make available to employees, please contact Lee Knight, David Williams-Richardson or your normal RSM contact who can help you review the position.