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HMRC: Working From Home – What AreTax Allowable Expenses?

May 28, 2013

Posted by Simon Misiewicz on 28th May 2013

Do you live in a property because of your work (second home / accommodation)?

Would you like to know what you can claim and what is considered to be Benefits In Kind (BIK)?

If you are using a second property because it is easier to commute to work then you could be receiving a taxable benefit from your employer. This only applies to people that have a limited company or work for someone else. This does not apply for sole traders.

If the employee has the option of taking the accommodation or taking a higher salary then the value of the rent is deemed to be earnings (1). If the employers pays an additional salary for the use of a property and makes deductions, the employee is still deemed to have earnings of the original payment without deductions being allowed (2). The amount deemed to be received by an employee is the market rental value of the property (3) (4)

The above benefits in kind only arise where the property provides “living accommodation” such as houses, flats and holiday homes The HMRC view is that living accommodation is something that gives the occupant the necessary facilities to live domestic life independently without reliance on others to supply basic needs. In practice we would be looking for an individual to at least have the use of a refrigerator and full cooking facilities, even if such facilities are shared (5).

However, if the employee must reside in the property then there is no benefit in kind. Examples being a social worker that stays with adults and children, prison wardens, security staff to name but a few (6).

If the employer pays for the move of the employee then the first 8,000 is not taxable (7).

So how do you calculate the benefit?

The amount of the benefit under Section 106 is:

Step 1 – the cash equivalent as if Section 105 ITEPA 2003 applied (see EIM11431)

Step 2 – ORI x (C – 75,000) (this amount is called the additional yearly rent), where:

C is the cost of providing the living accommodation (see point three above) and

ORI is the official rate of interest

Step 3 – calculate the rent that would have been payable if the property had been let for the taxable period at that additional yearly rent (see EIM11428 for taxable period)

Step 4 – add together the amounts calculated under step 1 and step 3. From this total subtract any excess rent paid by the employee. The answer is the amount of the benefit.

The excess rent is any rent paid by the employee to the extent that it has not already been allowed in step 1, that is, when calculating the cash equivalent of the Section 105 benefit (8)

Example

A house that had been owned by the employer since 1972 was first occupied by a particular employee on 6 April 1998 when the market value of the employer’s interest was 130,000. It cost the employer 60,000 in 1972 and an extension was built in 1981 at a cost of £18,000. In 2002/03 the employee paid rent of 1,000 per annum for it and for that year the official rate of interest was 5% and the gross rating value £800.

The calculation of the amount of earnings for 2002/03 is:

Insert picture of example From (9) the total cost of the property at 6 April 1998 (including the extension) exceeded £75,000 and – the employee first occupied it after 30 March 1983 and – the employer had owned it for at least six years by 6 April 1998, the date of the employee’s first occupation of

The improvements costing 18,000 are not included in the calculation of the chargeable benefit as they were incurred before the employee occupied the property.

If you would like to discuss what other costs are allowable then contact Simon for this month only and receive 30 minutes free consultation quoting “Tax Breaks”. For more information please contact us on 0115 946 1991 or Click Here To Email

References:

(1) EIM11308 – Accommodation: Continuing Right To Higher Wage Instead
(2) EIM11309 – Accommodation: Employer Deducts Rent From Gross Wage
(3) EIM11310 – Accommodation: Employee Allowed To Sub-Let
(4) EIM11321 – Accommodation: Meaning Of Living Accommodation
(5) EIM11432 – Living Accommodation: Definition Of Annual Value
(6) EIM11337 – Living Accommodation Exemption: Meaning Of Representative Occupier
(7) EIM03103 – Removal Or Transfer Costs: The Exemption From Charge
(8) EIM11480 – Living Accommodation: Section 106 ITEPA 2003: Amount Of Benefit
(9) EIM11484 – Living Accommodation: Section 106 ITEPA 2003: Amount Of Benefit Where Market Value Basis Applies



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk