Part 2
In our previous edition of
Focus on Education (Spring 2016) we looked at the provision of living
accommodation and the available
exemptions from a tax charge where
the employee satisfies the “job related”
rules. Part 1 explained how HMRC
calculates the benefits where the
provision of living accommodation
does not meet the exemptions.
There are a number of benefits that
can be associated with the provision of
living accommodation that need to be
considered separately.
1 Living accommodation
The benefit in kind charge on the provision of
living accommodation is dependent on the cost
of the property to the employer. There are two
ways in which the benefit can be calculated
and which one is used depends on whether the
accommodation cost greater than £75,000 or
less.
The cost of the living accommodation for this
purpose is calculated on the following basis:
-
The amount spent by the person/
organisation providing the property in
acquiring it, plus
- The amount spent by that person/
organisation on improving it prior to the
relevant tax year, less
- Any amount paid by the employee to
reimburse any of the above costs or for the
grant of a tenancy agreement.
It is necessary for the employer to review
the situation each year to determine if any
improvements have taken the property cost to
above £75,000. Repairs and decorating would
not normally be regarded as improvements.
Once the cost of the property has been
determined it will be necessary to calculate the
taxable benefit on the following basis.
Cost less than £75,000
Where the cost of the property is less than
£75,000 the benefit is the greater of:
The annual value of the property, or the rent
paid less any rent paid by the employee.
In the vast majority of cases where the
employer does not own the property the
benefit will be equivalent to the rent paid by
the employer. However the “annual value”
of the property will generally be used if the
property is owned, because for property
situated in the UK the annual value is based on
the rental values that were established back in
the 1970’s. For newer properties it is necessary
to estimate the rateable value as if the property
existed back in the 1970’s. These amounts are
significantly lower than the current rental value.
Cost greater than £75,000
Where the property cost greater than £75,000
the benefit is calculated on the same basis as
those under £75,000 however an additional
charge is levied on costs over £75,000. This
additional charge is calculated by applying
the official rate of interest at the beginning of
the tax year (currently 3%) to the excess over
£75,000.
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Example
If a property cost £200,000 and
had a rental value of £500 (based
on the 1970 figures) the living
accommodation benefit would be:
Step 1 - calculate the original benefit
as if the property was less than
£75,000.
This would be £500.
Step 2 – calculate the additional
charge (£200,000 less £75,000 =
£125,000 x 3%).
This would be £3750.
The benefit would therefore be
£4250.
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Please note – the calculation is based on “cost”
and not market value. So if an employer bought
a property in the 1950’s for say £60,000 this
may have a current market value today of
say, £500,000. This increase in value would
not affect the benefit calculation provided the
“cost” to the employer at the beginning of the
tax year was less than £75,000.
However, there are special rules that can apply
if the property cost more than £75,000 that
result in the properties market value being used
to calculate step 2 above. These rules apply
if, at the date the employee first occupied the
property, the employer had an interest in the
property throughout the previous six years.
For example if an employer bought a property
for Glenn to occupy at a cost of £200,000 in
July 1999 the benefit calculation for the him
at step 2 will be based on £125,000. However,
if Glenn left employment in 2015 and the
company then provided the property to Paul,
when the current market value is £500,000,
the benefit calculation at step 2 for Paul will be
based on £425,000. This is because when the
property was first provided to Paul it cost the
employer more than £75,000 and the employer
had owned it for at least the previous six years.
2 Furniture
The most common scenario that arises is where
an employer provides furniture because the
property is let furnished from a landlord. The
provision of the furniture is therefore within the
rent paid and no additional benefit applies.
If an employer furnishes the property, it
is necessary to work out the value to the
employee of being allowed to use this which
will depend upon whether the employer retains
ownership of the furniture or if it belongs to
the employee. If the employee simply buys
new furniture and the employer reimburses the
cost on the understanding that the furniture
belongs to the employee then a benefit in kind
will arise on the amount paid by the employer.
Where the employer retains ownership and
allows the employee to use it a benefit in kind
arises on the market value at the time it was
first provided to an employee. The benefit
is 20% of this value per annum. So if the
employer provided furniture with a value of
£5000 the taxable benefit would be £1000 per
annum. This applies, even if the employee is
provided with the furniture for more than five
years. It may therefore be worthwhile reviewing
any furniture provided to an employee for a
number of years to ascertain if it would be
cheaper to actually gift the furniture to the
employee.
Where furniture has been provided to an
employee an additional tax charge can arise
if the furniture is then sold/gifted to either the
same employee or another employee.
Example
If a desk was purchased at a cost of
£1,000 and used by employee 1 at
their home for two years and then
sold to employee 2 for £50 the benefit
position would be:
Employee 1 – the benefit would be
two years at a value of £200 (£1000
x 20%)
Employee 2 – the benefit would be
the original cost, less the amount paid
and less the value of benefits already
charged to employees.
That would be £550 (£1000 less £50
and £400). This would apply even if
£50 was the true market value at the
time of the purchase.
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3 Payment of household costs
Where the employer pays for household costs,
such as utilities, they are taxed as additional
benefits in kind based on the cost to the
employer, unless they can be specifically
identified as business costs. Where an
employee is provided with job-related living
accommodation that does not attract a benefit
on the provision of living accommodation this
exemption also extends to the employer paying
the employees Council tax and water rates.
If the employee is required to work at home
under a homeworking arrangement then the
employer may be able to pay for additional
household costs that arise whilst working
at home. HMRC will allow an employer to
reimburse up to £4 per week (£18 per month)
without requiring supporting documentation of the additional cost.
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