Where an accommodation benefit is provided as part of optional remuneration arrangements, the rules for valuing the amount of the benefit in kind (BIK) treated as earnings have changed.
Optional remuneration arrangements are arrangements where the employee gives up the right, or the future right, to salary, or some other form of cash pay in return for a benefit. This is often referred to as a ‘salary sacrifice arrangement’.
The rules for the taxation of such arrangements first changed in April 2017, however, transitional provisions meant that arrangements entered into prior to this date were protected until 6 April 2021 for living accommodation (providing those arrangements had not been varied in any way prior to that date).
When do the optional remuneration rules apply to living accommodation?
The rules do not apply where an employee pays market rent for the property out of their net, after tax salary.
The rules do not apply where the accommodation is provided as standard, for example, where a nurse or on-call vet is required to live in the flat above the practice with no option to live elsewhere (i.e. they are not given the alternative option of sourcing their own accommodation and receiving a higher salary in return). Instead, the normal BIK rules must be considered, the calculation for which is complicated in itself, but exemptions may apply such that no BIK arises (see further details below).
The rules do apply where accommodation is provided under a salary sacrifice arrangement (rent deducted from pre-tax salary) or where, on commencement of their employment for example, an employee has taken up optional staff accommodation and agreed to a lower salary.
What is the tax effect of these rules?
Where the rules apply, as under the last example above, the BIK to be declared is the higher of:
- The BIK calculated in the normal way; and
- The amount of salary given up in return for the benefit.
Under normal BIK rules, the accommodation may have historically been exempt, on the basis that it was ‘customarily provided for the better performance of duties, for example, to an on-call veterinary assistant. In respect of veterinary assistants (but not veterinary nurses) HMRC accept that the ‘customarily provided’ test is met, however the ‘better performance’ test has to be considered on a case by case basis. If the employee is required to be on call outside of normal hours, is in fact frequently called out and the accommodation is provided to give the employee quick access to the place of employment, then this latter test should be met.
Whilst this and other exemptions still exist to the BIK charge on accommodation, they are effectively overridden where there is a salary sacrifice arrangement in place. This is because, although the BIK calculated in the normal way, under 1 above, may be zero (as it satisfies the exemption), the amount of salary given up in return for the benefit under 2 above will be taken as the BIK figure as this will be the higher amount.
The tax advantage of such arrangements will therefore now be limited to the employee’s NICs saving only, as any income tax and employer’s NIC savings will no longer apply. There is the potential additional cost of professional fees for preparing the P11D form as well to take into consideration.
If you have any questions please speak to your usual contact in the Vet team.