Academic institutions often provide accommodation for their staff. Although this may be provided as a benefit, in some circumstances the benefit – which can be substantial in real terms – is not liable to tax. HMRC has been scrutinising these arrangements and schools and academic institutions have been subject to inspection so it is vital that your written and practical arrangements meet the tax requirements.

The good news is that a recent report from the Office of Tax Simplification (OTS) indicates that things may be easier in the future. The OTS published its third and final report on the taxation of employee benefits and expenses on 31 July 2014 (the Report). In particular, the Report made recommendations about accommodation benefits and proposals to revise the current exemptions. It is important to note that, although the rules have not yet changed, the Report emphasises the need to amend the legislation and puts the issue firmly on the policy agenda.

Current rules and criticisms

As things stand, accommodation provided by an employer to an employee is a taxable benefit except when it is:

  • provided for the better performance of the duties of the employment and it is customary for accommodation to be provided (e.g. independent school teachers living at the school in order to provide pastoral support to boarders)
  • necessary for the proper performance of the duties of the employment (e.g. workers who need to live on site, such as caretakers living on the premises)
  • necessary for security purposes
  • a home overseas owned through a company provided to a director or member of the director's family where the company is wholly owned by the director (and other individuals)

The Report criticises the “necessary for the proper performance of duties” test for being too narrow to use. In addition, the combined effect of the Working Time Regulations and the National Minimum Wage legislation is that resident staff are often no longer required to be on call for 24 hours a day. This further confusion to the rules - because resident caretakers are not automatically exempt as they previously were in the HMRC manuals - adds to the burden on employers to demonstrate that the employee comes within the exemption.

The Report also criticises “better performance of duties and customary” exemption for being onerous. HMRC has identified certain classes of employees, including specified staff in boarding schools, as falling under the exemption. However, where the job is not on the list of jobs accepted by HMRC to customarily provide employee accommodation, the employer has to demonstrate that there is a custom for employees in similar roles to be provided with accommodation. The HMRC assessment appears to artificially focus on job titles.

The recommendations

The Report has recommended that HMRC makes it clear within its manuals that it considers substantive roles rather than simply the job title. It has suggested that the most basic accommodation should be excluded from the tax charge altogether.

The exemptions should be reformulated so that the key elements for assessing the exemption include that:

  • the employee is required to live in the accommodation to perform their duties and this is contained in the employment contract
  • it is necessary for the employee to live in the accommodation to protect the building, people or assets
  • the employee is required to start work very early in the morning or finish work very late at night
  • the employee is required to live in the accommodation to comply with regulatory requirements (for example, child protection rules require at least two employees to be on-site at a boarding school during term time)

The recommendations would arguably offer a clearer regime and avoid the current preoccupation with the employee being “on-call” or not possessing a particular job title. The changes within the Report will assist employers within the education sector by providing clarity on when the provision of accommodation to staff is not a taxable benefit.