Director's "temporary" living accommodation

Director's "temporary" living accommodation

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A client works through a personal service company, and let us ignore any IR35 issue.

The client has through his company had a contract which has lasted so far for around eighteen months. He tends to have only one client at a time. Because the client business to which he provides his services is over 100 miles from his home, he had been in the habit of staying in a hotel adjacent to the work premises three or four nights a week. However, for reasons of cost, my client's service company has rented a flat close to the work premises on a Shorthold Assured Tenancy basis and the letting period has rolled on to about sixteen months now. He still stays three or four nights a week away from his own home.

I am concerned that this amounts to provision of living accommodation to the director client and although it was a reasonable commercial decision on his behalf to save money, we are getting to a point where this is potentially a chargeable benefit if we are not there already. Clearly there is a kitchen and other necessities for independent living, and not the reliance on services one would expect in a hotel. The directorship appears to preclude any of the special exemptions even if they were arguable otherwise. I have been advised by my paid-for help that up to 24 months might be OK if the original decision had been demonstrably for commercial reasons. Beyond that they suggest the benefit charge would kick in. I think the significance of a two year period is that the temporary workplace would become a permanent one.

Suppose the director changed flats, would there be any different treatment, or am I barking up the wrong tree? Alternatively can he carry on as he is?

I have of course only just found out about this because I queried expenses in preparing the company accounts. Any help or experience in similar scenarios would be appreciated, thank you.
Old Horace

Replies (19)

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By Ronnie Stanley
16th Dec 2008 10:24

"Not available for private occupation"
In his last post, Dave underlined what seems to be the vital phrase used in the quote from Booklet 480. That is, "and is not available for private occupation".

In the situation described by the OP, the flat is used only when the employee/director is away from home on business 3 or 4 days a week, & is provided as a cost effective alternative to the hotels previously used.

No private occupation, hence the 'expenses claim' should be allowed.

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By User deleted
15th Dec 2008 16:41

Directors
But is the position different when it concerns a Director with a material interest?

You may be interested in the response given by Paul Soper in this earlier thread.

Was Paul correct?

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By Dave Paveley
12th Dec 2008 21:42

Great quote Ronnie..

I will use that in support of any defense that may be required in future.

However, don't you just love the way HMRC paraphrase:

"..If the accommodation is no more than an alternative to hotel accommodation and is not available for private occupation the whole cost of renting and running the flat may be allowed as a deduction..."

My first emphasis is always going to be caught unless you contractually restrict the employee from using the flat at weekends (unlikely) and even so they leave the may word in there as a final resort of an attack if the particular inspector in question felt particularly obstinate.

Why can they never just say 'here is our interpretation, no ifs buts or maybes'!

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By thehaggis
11th Dec 2008 19:41

Dave

By your own reasoning, staying in a hotel isn't allowable either because it isn't travel.

Does it matter matter he stayed. The question is whether he has incurred a cost attending a temporary workplace. In this scenario he has incurred the cost of living accommodation. It is deductible under s338.

Nicola, John and Euan all agree with me. I think you will find that we are right.

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By Euan MacLennan
10th Dec 2008 17:37

I agree with John
There is nothing inherently wrong in renting a flat (or even, buying a flat) as opposed to staying in a hotel. You are right in thinking that the point at issue is the status of the workplace.

The costs of travel to a temporary workplace and of accommodation and subsistence in the vicinity of a temporary workplace are deductible for tax purposes while the workplace remains temporary. As soon as the job is expected to last more than 24 months - not just actually does last, but as soon as a contract is signed or renewed that would take the job beyond 24 months or even if no contract is signed, but it becomes obvious that the job will extend beyond 24 months - it becomes a permanent workplace and travel to it is treated as regular commuting. This means that no travel, accommodation or subsistence costs are deductible by the company for tax purposes and if any are paid, they are taxable benefits of the client. Have a look at the guidance in PAYE booklet 490 Chapter3 - Earl is the relevant example.

Changing the accommodation is irrelevant.

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By User deleted
11th Dec 2008 15:18

Now, now!
Interesting debate, but you have to look at this from the travel perspective, otherwise it is unworkable.

Is the travel allowable?
Yes, we think it is covered by the termporary workplace rules (double check those are applied correctly though).

As "Yes" then travel, subsistence, accommodation and incidental costs also allowed as an expense of employment. No BIK.

I always think that HMRC has the temporary workplace rule wrong, as it goes, see Think you understand temporary travel rules?

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By User deleted
10th Dec 2008 18:34

Thank you very much, John and Euan
Very useful. Euan, I guess the payment of accommodation and commuting expenses would be tax deductible in the company if paid on behalf of the director, but to clarify, the value of the payments would be a taxable benefit for the director from the point the temporary workplace became permanent.

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By Dave Paveley
10th Dec 2008 23:40

Euan's reference to helpsheet 490..

..is concerned only with travel expenses, not accommodation. So here are a few references of my own:

EIM11321 clearly differentiates between a hotel room and a flat with the latter only being living accommodation.

There would be no exemption given under the 'proper performance' test as occupation needs to be essential to the job. Not really the case here as is explained at EIM11341.

The only other exemptions to the charge are not available to directors with a material interest in the company. This is nicely covered in s99(3) ITEPA 2003.

I am, of course, willing to be corrected, preferably by reference to the legislation.

Oh, and your second sentence, Haggis, seems to be nonsense. As the company is paying for the flat, there is no reimbursement so I am not sure what expenses you would be off-setting against the benefit in kind.

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By Ronnie Stanley
12th Dec 2008 15:44

Booklet 480
Sorry to come in late on this, but thought this extract from the Expenses & Benefits Booklet 480 might be of interest. (Chapter 21 Provision of Living Accommodation).

"If accommodation is provided for an employee, for example, in a flat or hotel, while the employee is on business duties away from his or her home and normal place of work, the cost of this may be allowable as a deduction under the expenses rule. For example, a company in Yorkshire may rent a London flat for an employee who has to make frequent business trips to London. The extent of any deduction will depend upon the circumstances. If the accommodation is no more than an alternative to hotel accommodation and is not available for private occupation the whole cost of renting and running the flat may be allowed as a deduction."

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By User deleted
12th Dec 2008 07:48

Thank you very much, everyone
for your very useful contributions. This is a bit of a hot potato and a difficult issue. My client already wants to shoot the messenger and you have given me some great ammunition to defend myself with more good advice.

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By Dave Paveley
11th Dec 2008 23:06

Haggis

I will bow down to your superiority and accept your opinion in conjunction with Nichola, John and Euan.

I have never contested that hotel accommodation would not be deductible, on this we were always in agreement.

I still believe that accommodation is defined separately from living accommodation in the legislation, of which hotels fall into the former and flats fall into the latter.

However, if this is not in point with regard to a S.338 claim then so be it.

Debate over.

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By Dave Paveley
11th Dec 2008 15:17

I apologise for rattling your cage Haggis..

..it has obviously affected your train of thought.

Let us remember that this is a forum for debate and not for making assumptions about each others experience, or lack thereof.

I agree that I should have used the word 'interpretation' rather than 'concession' - my error.

To quote from that section "This article covers some issues that are particularly relevant for employees who are sent by an overseas employer to work in the United Kingdom. So the examples are drawn from those cases."

I assert that HMRC will use that statement to contend that their interpretation is not meant to cover the situation in hand. I suspect we will disagree on that particular point but that is by the by.

Of more importance to my argument, if you read it, is that the legislation distinguishes between accommodation (hotel room, other forms of board and lodging and non-residential accommodation such as a workshop, garage or office) and living accommodation e.g. a house or flat.

I reiterate that S.336, s.338 and in fact the whole of Chapter 2 of ITEPA is irrelevant because the provision of living accommodation is NOT travel however much you would like it to be!

I am, as always, willing to have my opinion changed by learned contributors on this site but I think your argument falls flat on the above point (excuse the pun).

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By thehaggis
11th Dec 2008 14:09

Dave
You are barking up the wrong tree. It would help if you read properly what you are being told.

Ignore everything about exempting accommodation from the tax charge. We are NOT exempting it. The provision of accommodation has a cash equivalent and we are going to include that in the tax calculation. We agree that it is not exempt, but for some reason you keep ignoring that simple fact.

s336 is not in point. I said s338. Read it. It says that the cost attributable to necessary attendance at a temporary workplace are deductible. No-one has said that the attendance was not necessary, so where have you got that from? Or are you confusing this with s336 which requires the expense to be necessarly incurred - if you are then also consider that s336 does not apply to travel expenses. Again a little careful reading would help.

It is an established fact that travel expenses include all the costs of attendance at a workplace. This means that subsistene - food, drink and overnight stays - is covered by s338. s338 is only concerned with the costs. It does not say that the food must be fish and chips rather than a restaurant, and it doesn't say that any overnight stay must be in a B&B or a hotel. We are only looking at the cost. Is the cost in connection with attendance at a temporary workplace? Has attendance at the temporary workplace resulted in a cost?

The cost in this case is the cash equivalent of the accommodation. So although the cash equivalent is assessed under s103, it is also allowed as a deduction under s338. S364 treats the cash equivalent as an amount which can fall within s338. You were looking in the right place but did not understand what was in front of you.

TB50 is not a concession. It is a statement of how HMRC interprets the law. An employee seconded from Aberdeen to London will have the same treatment. A secondment is simply attendance at a temporary workplace, meaning that s338 applies. There are no special rules for secondments.

Dave, this is clearly an area that you do not understand and probably have no experience in. Please accept that you are wrong.

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By Dave Paveley
11th Dec 2008 09:01

Haggis

Tax Bulletin 50 (Click here for a link that works, please check yours) refers only to HMRCs concession for foreign employees sent on secondment to work in the United Kingdom.

It would be interesting to see if the OP could persuade HMRC that the same concession should be given to a UK based owner/director. I have my doubts.

I think he would be referred to the more relevant guidance in the Employment Income Manual quoted in my earlier post.

S.99 of ITEPA quite clearly states that full-time directors with a material interest have no exemption from charge to a living accommodation benefit, on this we appear to agree.

I do, however, disagree with your assertion that living accommodation should be bundled together with travel because there is no mention of living accommodation in the act. Well, there is a whole chapter. Chapter 5. I also refer you, once again, to the difference between accommodation and living accommodation here.

I do not believe S.336 is in point here because S.364 specifically covers where a reduction in the benefit charge for living accommodation is appropriate and, in any case, I think the necessarily test is going to fail.

I agree with the sentiment that the cost of providing a flat shouldn't be treated differently to providing hotel accommodation but I still assert that it does according to the legislation.

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By thehaggis
11th Dec 2008 01:08

Dave
S338 ITEPA allows for the deduction of travel expense. There is nothing in the Act that covers subsistence or overnight accommodation - they are all taken together as travel. If an expense is incurred in the course of travel, it is treated as a travel expense. See section 5.4 of the 490.

You are quite correct when you say that there is nothing that exempts the provision of accommodation in these circumstances. No-one has suggested that. What has been said is that a deduction may be given for the costs incurred if they are connected with allowable travel.

You may not be aware that where an employer provides a benefit, or reimburses an expense incurred by an employee, or meets that expense direct, the employee is chargeable to tax on that amount. The employee then has to claim a deduction under ss336-338 (whichever is appropriate) to prevent the charge to tax on allowable expenditure. Read sections 1.4 - 1.7 of the 490.

Where accommodation is provided the employee is assessed on the cash equivalent, calculated in accordance with s103 ITEPA. This cash equivalent is assessed on the employee. The employee can claim this as a deduction if the accommodation relates to his necessary attendance at a workplace.

Finally, try reading Tax Bulletin 50. There is an article here about how the travel rules will apply to inbound expatriate employees - in this sector most secondees are provided with living accommodation for the duration of their secondment. The principles are the same. The temporary workplace rules apply to these secondments in the same way as more usual temporary workplaces.

If you do not understand a subject, it is not very courteous to refer to advice given as nonsense.

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By thehaggis
10th Dec 2008 21:17

Dave

Euan is perfectly correct. The question is whether the expense is incurred in connection with attendance at a temporary workplace. If it is, then an employer can provide a house if it is reasonable to do so.

Essentially the house is taxable as a benefit (the same way as any reimbursed expenses would be taxable) but the employee can claim a deduction in respect of the costs incurred - in this case the cost will be equal to the notional benefit of the house.

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By Dave Paveley
10th Dec 2008 19:34

I'm no authority here but..

I think the temporary workplace arrangements are a moot point.

Residential accommodation is being provided and therefore a taxable benefit arises on the employee.

Is it unfair that hotels represent no benefit but a cheaper flat does? Yes, but since when has tax legislation ever been fair?

Oh, and all of the costs are a legitimate deduction for the company regardless of the length of the engagement. The issue in point is whether those costs are also an assessable benefit for the director.

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By User deleted
10th Dec 2008 17:01

John
I am not saying IR35 is not an issue, I am asking that we put it aside whilst discussing the accommodation matter. Any other comments, please?

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By User deleted
10th Dec 2008 16:57

Temporary Accommodation
The change of accommodation from a hotel to a flat for commercial reasons is not, by itself, an issue. The two issues your client has is:

IR35 - This should not be ignored. If IR35 applies then the Deemed payment Calculation must be prepared

Length of current contract - as his current contract has already lasted 18 months, when does it run to? If it runs to a date over 24 months from the start of the assignment he can no longer have any tax free travel expenses

John Hill

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