Taxable benefits: living accommodation explained

Boarding schools sometimes provide living accommodation for staff members. The provision of living accommodation is often treated as a taxable benefit subject to a number of exemptions. In this article, we focus on two of the most common exemptions in our experience, namely (a) where the living accommodation is necessary for proper performance, and (b) where the provision of living accommodation is customary and aids better performance. For these purposes, “living accommodation” takes its everyday meaning and includes flats, apartments and houses.

General position

Where an employee is provided with living accommodation by their employer, the employee is usually taxed on the greater of:

the amount forgone in relation to the provision of the benefit (i.e. the amount sacrificed in the employee’s salary)

the cash value of the benefit.

For the purposes of accommodation, the cash value of the benefit means:

where the cost of providing the accommodation is not over £75,000, the rental value of the accommodation for the taxable period

where the cost of providing the accommodation is more than £75,000, the amount of the benefit must be calculated using the formula in HMRC’s guidance and should be approved by HMRC before any computations are put to or agreed with the employee.

However, as noted above, there are exemptions to this default position. Where the situation falls within an exemption, the provision of accommodation will be exempt from income tax and NICs.

We set out a case study below to explore one of the exemptions in action.

Case study: background

Barrow Hill boarding school has recently employed a caretaker and a teacher. The caretaker’s working hours vary and can include being required to work outside their standard working hours. The current caretakers are all provided with on-site accommodation as part of their employment, as is the newly employed caretaker. The living accommodation is provided to the caretakers so they can better perform their duties.

The newly employed teacher is also provided with living accommodation, although this is not customary at Barrow Hill. The new teacher requires on-site living accommodation as their current home is too far away to commute each day.

Possible exemption: essential for proper performance of their duties

One potential exemption that may be applicable is where there is a necessity for the employee to be living on site for the better performance of their duties of employment.

To qualify for this exemption, the employee must (a) fall within a particular classification of employment (Role Test) and (b) the property must be essential to the proper performance of the duties of employment (Essential Test). HMRC provides a non-exhaustive list of examples of the type of jobs that would satisfy the Role Test, which include:

agricultural workers who live on farms or agricultural estates
lock-gate and level-crossing gate keepers
caretakers living on the premises: this only covers those with a genuine full time caretaking job who are on call outside normal working hours
stewards and green keepers living on the premises
wardens of sheltered housing schemes living on the premises where they are on call outside normal working hours.

In order to satisfy the Essential Test, HMRC states in its guidance that the “occupation of the particular property (as opposed to any other property) [must be] essential to the proper performance of the duties of the employment”. Crucially, the courts interpret this test very strictly, stating “if it is asserted that it is essential for the [employee] to occupy the house in order to perform his duties, it seems to me that the [employee] must establish affirmatively that for the performance of his duties he must live in that house and no other”, again the language of “that house and no other” highlights the strict nature of the test. Therefore, in order to rely on this exemption, the employee must be able to prove that the particular accommodation they are living in is necessary for them to better perform the duties of their employment. It will clearly be insufficient if the sole reason for living on-site is because it is cheaper for them to rent on-site or it allows them to be closer to their place of work.

It is also worth noting that the exemption will only apply to the extent such a necessity exists i.e. if such a necessity is withdrawn it would result in the provision of living accommodation being reclassified as a taxable benefit.

Case study analysis

It is quite possible that the necessity of performance exemption applies to the caretaker. Caretakers are listed as one of the prescribed jobs (therefore satisfying the Role Test) and, in our example, their responsibilities mean they are required to perform tasks outside of their normal working hours (therefore appearing to satisfy the Essential Test). Specific facts would always need to be considered to ultimately reach a view as to whether on-site living accommodation is required to necessitate the caretaker to perform their duties. However, on the face of it, it appears reasonable to conclude that the exemption could be available on our limited facts.

Teachers do not fall within the prescribed classification, and, although the list provided by HMRC is not exhaustive, ultimately, the teacher living too far to commute is unlikely to be a sufficient reason to support the application of the exemption.

Possible exemption: accommodation allows better performance of the employees’ duties, and it is customary

An alternative potential exemption may apply to the teacher, where (a) it is customary for accommodation to be provided to such employees (Customary Test) and (b) it also better enables them to perform their duties (Better Performance Test) (which appears to be a lower threshold than the exemption which necessitates the employee living on-site).

HMRC has set out a list of roles where it accepts that the Customary Test is met, which includes, for example, religious leaders and members of the armed forces. Once again, the list is not exhaustive. The Customary Test is not defined in legislation, and therefore it is given its everyday meaning i.e. a practice “that if it is recognisable as the norm and if failure to observe it is exceptional”. HMRC guidance provides clarity on the Customary Test, that “it must be shown that it is generally customary in that kind of employment generally for accommodation to be provided”, considering also employees holding similar positions with other employers.

When considering the Better Performance Test, the key point to consider is the employees’ duties that are performed outside of their normal working hours. For example, are they required to be on call during the night, having worked all day? It might be possible to claim that on-site accommodation is required for them to better perform their duties of employment if their presence on-site would help them handle a situation better or stop a situation from occurring in the first place.

Case study analysis

As it appears that the caretaker can already benefit from an exemption, we are only focusing on the teacher.

The provision of on-site accommodation to the newly appointed teacher could potentially allow for better performance of their duties; however, it does depend on what those duties are. For example, if they have to run a club or participate in meetings outside of the typical working day, it might not be sufficient to satisfy the Better Performance Test, as they could easily live off-site and still perform their role. Alternatively, if they have a pastoral care role, for example, a deputy houseparent, then they may need to be available at all hours of the day, which would support living on-site.

Even if the Better Performance Test is satisfied, the Customary Test must also be met. This would require a full appreciation of the teacher’s role, whether others with a similar role benefit from on-site accommodation, and a general understanding of the position taken in other schools. It is quite possible that certain roles would satisfy the exemption’s requirements, but others would not. In this example, it appears that the main reason for providing accommodation is to mitigate travel time as opposed to being linked to the specific role, and therefore, the provision of accommodation is likely to be taxable.

If you have any specific queries regarding taxable benefits or employment taxes more widely, please contact a member of the Birketts corporate tax team.