Many employers, where they have live-in employees, often struggle with calculating the benefit of living accommodation. Most notably, whether there is a benefit to declare and, if so, how to calculate it?
There is no easy solution. The benefit calculation is complicated and is based on a range of factors, depending on the cost of providing the accommodation, including any improvements, the date of first occupation, the amount of time the property has been owned. In certain cases the market value also needs to be considered.
If the employer pays for any other costs associated with the accommodation, such as Council Tax, water rates, heat and light, the provision of furniture etc, these also need to be considered for P11D reporting purposes.
It is worth noting that there are exemptions available for employers. Briefly, these include:
This involves research into roles the employer offered in 1977. If employees were treated as ‘representative occupiers’ up to 5 April 1977, then they can continue to be treated as exempt provided circumstances are unchanged. This can be difficult to prove in practice though, where record keeping hasn’t been maintained.
Necessary for performance of duties
Here it must be proved that the occupation of a specific property is essential to the role of the employee. There are a strict set of categories of employee HM Revenue & Customs (HMRC) agree this applies to, including agricultural workers who live on agricultural farms or estates, full time caretakers and managers of caravan sites.
Customary and for the better performance of duties
This appears more flexible, but both parts must be met for the exemption to apply. HMRC’s approach has changed to specify that there is no ‘custom’ where less than half of the employees in a sector are provided with living accommodation. To meet the better performance test, it must be demonstrated that by occupying the accommodation the employee can perform their duties better than if they lived elsewhere.
This is where there is a special threat to the employee’s security, special security arrangements are in place and the employee resides in that accommodation as part of those arrangements.
With the advancement of technology and the diversification of many traditional rural businesses, these exemptions are starting to appear out dated and the conditions of them more and more difficult to meet.
At the time of writing, we are still waiting for the Office for Tax Simplification review on living accommodation.
National Minimum Wage pitfalls
HMRC is very active at present with National Minimum Wage (NMW) investigations across a range of employers. Their investigators are target-driven and are motivated by the amount of arrears they find and the number of employees they find arrears for.
There is a 200% non-negotiable penalty on all arrears found over a six-year period for current and ex workers (reduced to 100% where this is paid within 14 days), and where all arrears total more than £100, the employer will be named and shamed. There is currently a temporary suspension of the naming and shaming policy though, while the government reviews the effectiveness of its enforcement policy.
The main issues employers are breaching, leading to inadvertent NMW underpayments, relate to:
- The provision of benefits such as accommodation. Where this is rent free then an amount known as the ‘accommodation offset’ is added to pay for NMW purposes (currently £7.55 a day). But where employees are charged rent, then any excess daily charges above the NMW day rate will reduce their pay for NMW purposes.
- Deductions from pay for things like own goods, products, food, salary sacrifice arrangements, Christmas clubs/savings schemes. These can cause breaches where the NMW rate isn’t monitored and maintained following the application of deductions.
- Provision of uniform or equipment to carry out a role. Where this isn’t provided by the employer, an equivalent cost is applied as a deduction for NMW purposes to pay, to represent the cost the employee has had to incur in order to carry out the role. This can apply to clothing that the employer may request the worker to wear, or items of equipment required for the role, such as IT goods and tools of their trade.
- Volunteers. HMRC is challenging whether the individual is truly a volunteer or actually a worker for NMW purposes. Care is needed with the wording of any agreements used and this includes any promise of a contract or paid work in the future. Volunteers can be paid amounts to cover any expenses incurred but any flat rate payments need to be avoided.