Employer-provided accommodation has long benefited from a valuable tax exemption in certain circumstances. However, a recent update to HMRC’s Employment Income Manual serves as a timely reminder that the availability of the exemption cannot simply be assumed based on historical practice.
HMRC has recently withdrawn its long-standing acceptance that police officers automatically fall within the scope of the exemption under section 99(2) ITEPA 2003. While this development directly affects police forces, it raises a broader question for all employers providing accommodation to staff
Understanding the exemption
As a starting point, living accommodation provided by reason of employment will generally give rise to a taxable benefit-in-kind.
However, section 99(2) ITEPA 2003 provides an exemption where two conditions are satisfied:
- The accommodation is provided for the better performance of the employee’s duties; and
- The employment is one in which it is customary for employers to provide living accommodation.
Both requirements must be met. It is not enough that living on site is convenient or beneficial. There must also be a recognised practice within that type of employment generally for employers to provide accommodation.
What’s changed for police officers?
For many years, police officers featured on HMRC’s accepted list of employments that satisfied the customary test. That is no longer the case.
HMRC has updated its guidance and now states that the section 99(2) exemption is no longer available to police officers because it is no longer customary for police officers to be provided with living accommodation.
Importantly, this change does not extend to the Ministry of Defence Police, which remains an employment category that HMRC accepts can satisfy the exemption.
The law hasn’t changed
The key point for employers is that this is not a legislative change. Instead, HMRC is challenging whether the factual conditions necessary to access the exemption continue to exist.
Why this matters beyond policing
Many organisations rely on historic assumptions when determining the tax treatment of living accommodation. Employers should therefore ask themselves:
- Is accommodation still commonly provided across this type of employment?
- Are we relying on historic precedent rather than current market practice?
- Can we evidence why the exemption applies today?
The question is not simply what your organisation does. The relevant consideration is whether accommodation remains customary across the wider employment category.
Do not forget the “better performance” test
The recent discussion around policing has focused on the customary requirement, but employers should not overlook the accommodation must also be provided for the better performance of the employee’s duties.
Employers should revisit the reasons for providing accommodation and consider whether it remains valid. Relevant factors may include:
- The need to respond quickly to emergencies or operational issues;
- Significant out-of-hours responsibilities;
- Pastoral or supervisory duties outside normal working hours; or
- The practical benefits of living on or near the employer’s premises.
Where accommodation arrangements have been in place for many years, it may be worthwhile refreshing internal documentation to ensure the business reasons for providing accommodation are clearly evidenced.
A good time for a health check
HMRC’s revised position on police accommodation highlights an important principle: tax exemptions often depend as much on facts as they do on legislation.
While the section 99(2) exemption remains available, employers should ensure that both the customary and better performance requirements continue to be met in practice.
How HaysMac can help
If your organisation provides living accommodation to employees and you would like to understand the implications of HMRC’s revised guidance, please contact a member of the HaysMac Employment Tax team. We can help review existing arrangements, assess the availability of exemptions and identify potential employment tax risks before they become liabilities.
