A little-known tax rule change for farm business owners who provide free, or below market value accommodation to their workers is about to come into force.
HMRC are to withdraw the Extra Statutory Concession (ESC) which facilitates the current favourable tax free treatment of individuals provided with living accommodation on farms and estates by their employers, by their reason of employment described as “Representative Occupiers”.
The ESC relates to living accommodation provided for posts which existed before 6 April 1977. The affected individuals may be retired or still working.
From 6 April 2021, the employees will be in receipt of a taxable benefit in respect of the living accommodation provided, for entry on form P11d.
The employers will also need to pay class 1A National Insurance at 13.8% on the benefit.
From the beginning of the new financial year on 6 April 2021, the amount of income tax the employees will need to pay will be determined by their marginal tax rate:
- Basic (20%)
- Higher (40%) or
- Additional (45%)
Retired employees may find the taxable benefit, (based on the purchase price of the property plus cost of improvements), quite low, and possibly be covered by unused personal allowances, if their retirement income is also low. In this instance the amount of tax and class 1A National Insurance payable could make it affordable for the retired employees to live out their retirement in peace, with no change from their current arrangement in this regard.
For others where the taxable benefit may be significant, they may need to adjust their payments to HMRC accordingly.
It is really important, therefore, to calculate the taxable benefit arising from 6 April 2021, on the provision of the living accommodation before a decision is made.
Fortunately, there are some exemptions to this new regulation, so farm and estate owners need to act as soon as possible to check if the tax-free accommodation they currently provide for their employees could qualify for relief.
Importantly, in addition to employment contracts, written evidence should be kept to substantiate claims, such as timesheets and other signed forms providing proof of working hours.
There are three main exemptions:
- Customarily provided for the better performance of duties. Where over fifty per cent of the farm’s employees who are in the same role, or the same kind of employment, and are provided with accommodation.
- The accommodation is necessary for the proper or better performance of duties. This is where it can be substantiated that an employee needs to be on-site, outside usual working hours - for example to be regularly on-call for estate security or to carry out duties at anti-social hours.
- Required for the personal security of the employee. This is less common, but refers to work where the kind of activity the employee carries out may mean there is a threat to their personal safety and security.
If you think that this change may affect your business you should contact your tax adviser as soon as possible in order to clarify your situation, and to make any necessary adjustments.