COMPLIANCE
What if an exemption doesn’t apply? How do employers value the accommodation benefit? The rules for valuing living accommodation for benefit in kind purposes are complex and can depend on several factors, including: l whether the property is owned or rented by the employer l its gross rateable value under the old system of rates, and l whether it’s considered an ‘expensive’ property for these purposes. Employers also need to consider the OpRA rules where the employee has given up salary in exchange for living accommodation. Where these rules need to be considered, the taxable benefit is the higher amount between salary foregone or the modified cash equivalent of the benefit, which is the amount under the normal benefit rules. So, live in / live out pay scales or different packages offered as part of the recruitment process could also impact on the taxable benefit calculation. The calculation of the cash equivalent of the benefit depends on certain factors. For example, where it is owned by the employer, and costs less than £75,000 (this cost must include any expenditure incurred in acquiring the interest in the property plus the cost of any improvements), the cash equivalent is determined based on the old rating value (see EM11431). Where the cost was more than £75,000, there is an additional charge (see EIM11472). For properties costing more than £75,000, there is also a rule which deems the ‘cost’ to be market value when the employee first occupies the accommodation, when an interest in the accommodation was held by the employer, or a person connected to the employer for more than six years prior to the employee’s first occupation. This, again, can prove difficult to administer in terms of the record keeping requirements, especially as the rule is only relevant where the original cost, plus improvements, was over £75,000. The rules for valuing living accommodation for benefit in kind purposes are complex
Associated costs and utilities If no exemption applies, then any associated costs are taxable and subject to National Insurance contributions (NICs) and need reporting. The tax and NICs treatment (i.e., whether it is a payroll or P11D item, or a mixture of both) depends on who (the employer or the employee) contracts with the supplier and how the employer pays the bills. For assets provided, such as the use of furniture or appliances, there’s an annual tax charge on 20% of the market value of the asset when it was first provided as a benefit (see EIM21710). Where living accommodation itself is exempt from tax (under one of the exemptions considered above), there’s a limit on the value of certain items on which an employee is taxed, and the employer is liable to NICs, under Section 315 ITEPA 2003 (see EIM21721). The limit is 10% of the employee’s earnings after deducting any employee pension contributions which qualify for tax relief. This would typically relate to expenses covering heating, lighting, cleaning, internal decoration, repairs (but not repairs to the structure, electrical or heating installation) and the provision of furniture and appliances. Additionally, the following amounts, whether paid on behalf of, or reimbursed to the employee, are excluded from general earnings for employees in exempt accommodation: l council tax l water charges (even where metered) l sewerage charges. What happens to retired employees who are still provided with living accommodation and other related benefits by their former employer? Where the exemption in Section 99 ITEPA excludes accommodation as a taxable benefit for an employee, it will also be an excluded benefit post retirement where: l an employee continuously occupied the accommodation or similar accommodation for a period of five years immediately prior to retirement l the individual continues to occupy the same or similar accommodation after retirement. These rules applied from 2006, but had retrospective effect, and it was long
thought this included those covered under the RO exemption, which fell away in April 2021. HMRC confirmed this is not the case, meaning that retired employees are only not taxable on the continuing provision of accommodation where the above conditions are met (see EIM15022). What should employers do now? We recommend employers review the position taken on living accommodation and keep an eye out for any developments in future, including: l reviewing any HMRC agreements (or previous reviews) on accommodation and associated costs to check what exemptions apply, i.e., who was covered by 99(1) and (2) and if the same conditions and circumstances remain in place l ensuring detailed records of the benefit in kind calculations are maintained in case of a future review l identifying which employees have been offered a cash alternative or different pay scales for live in / live out and when, and ensure you clarify how the OpRA rules might apply to those arrangements l ensuring records of the costs of all accommodation (identifying each property separately) are maintained, including details of any improvements made during the employer’s ownership l considering whether employees’ contract terms (employment contracts or any licence to occupy) need to be amended, or if you should consider moving people around l considering what records may be required in future to demonstrate why an exemption continues to apply (such as rotas, call-out logs etc) l reviewing the long-term objectives and planning future accommodation provision, remembering that in future the taxable benefit calculation might be amended to consider market value / market rent. n What should employers do now? We recommend employers review the position taken on living accommodation and keep an eye out for any developments in future
| Professional in Payroll, Pensions and Reward | November 2022 | Issue 85 18
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