HMRC proving less than accommodating

Taken from the April 2016 edition of Land Business Magazine, the magazine for members of Scottish Land & Estate; by Rory Kennedy, Rural Estates Partner.

“The modern working estate can be a complex beast with multiple entities and income streams. However. HMRC appears slow to understand these nuances when addressing accommodation provided to estate workers. Where estate accommodation is provided, workers need to satisfy a series of tests to avoid this being a taxable benefit in kind and HMRC has maintained an aggressively high bar.

The first of these tests is that an employee’s accommodation is ‘necessary for the proper performance’ of duties. Unfortunately, the test is only satisfied where the employee can demonstrate that occupation of that particular property is essential, and in practice this has proven a very difficult argument to make.

HMRC guidance states examples of roles that are likely to be exempted and this list is very prescriptive. While most typical estate roles are not listed, HMRC accepts that agricultural workers who live on farms or agricultural estates all qualify for exemption.

It could be argued that this favoured status is a historical anomaly. In certain animal husbandry roles there is a case for on-site accommodation being necessary; however it would be harder to argue an arable farmer has such a necessity throughout the year.

While some non-agricultural estate staff may have a far more robust practical reason for tied accommodation than the estate’s farming staff, they may find themselves disadvantaged in having to pay income tax and NIC on their accommodation. For example, caretakers are the only other likely estate role listed in the HMRC guidance under the ‘necessary’ test but this only relates to very specific, full-time roles with weight placed on being contractually required to be on call outside normal working hours.

It is worth pointing out that tying an employee to live in a certain property as part of their employment contract makes no difference to meeting the necessary test, and the argument that the employee cannot afford to live elsewhere has also proven irrelevant.

An alternative exemption exists in the form of a two-part test. The employee has to demonstrate that the accommodation provision is both ‘necessary’ for the better performance of their role and ‘customary’ in practice.

The first part of the test largely hinges on whether core duties are performed at the work place, outside the employee’s normal hours and including any
normal unsocial hours. Included in this is the requirement to be otherwise on-call and requiring quick access to the place of employment.

Before exemption can be given the burden of proof is on the taxpayer to also demonstrate that the provision of accommodation is ‘customary’ for a class of employment across an industry. This would generally require statistical evidence; however, it is only one factor and the taxpayer must also argue how long the practice has existed and whether it has achieved ‘acceptance generally by the relevant employers’. The most prominent test case concerned accommodation for a nursery foreman. It was held that although two-thirds of nursery foremen in the United Kingdom lived in provided living accommodation, it was not conclusive that a ‘custom’ existed.

There are two further exemptions which are very specific and not worthy of much space here, but it is worth noting that there is a grandfathering rule addressing roles that existed before 1977. Importantly, this is the role, not the current employee’s service.

Driven by the Office for Tax Simplification, HMRC does appear to acknowledge the current system’s anomalies and opened this up to formal consultation in December 2015. This consultation has now closed, with feedback from many estate and farming representative bodies. We can only hope this will deliver a more level playing field for all rural estate workers.”