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Benefit in kind on living accommodation

Split business and living

Three brothers are directors of a company, currently living in Manchester. The nature of the business is such that they need to run the business from London, and thus will move there. Rather than rent an office and accommodation, their plan is to rent a 3 bedroom flat and use the bedrooms and kitchen for personal use, and the rest of the flat for business use. Other employees will also be working in the flat. The company will be paying the rent, and thus a BIK will arise, divided between the three brothers. The question is how much is allowable as business use.

HMRC's guidance (480) says:

"Where the employee is necessarily obliged to use part of the property exclusively for business, the expense of such use may be deducted in arriving at the tax charge. For example, there may be circumstances in which part of the accommodation has to be reserved for business purposes, such as a showroom. In these cases, an appropriate deduction may be given for tax purposes."

No indication is given of what an "appropriate deduction" would be. I would have suggested square footage, but the client is not happy, saying:

"Allocating the usage based on square footage is simply not representative of reality. All three of the permanent occupants are working on ABC Ltd 24/7, less sleeping hours. Time is a much more accurate measure here. The flat is more like an office with beds in it, than a flat with an office in it. Take a 24 hour period. All three of us spend maximum 6 hours sleeping. Less than 1/3 of the time. Outside of these hours we are at work. 7 days of the week. The engineers will be in the flat for most of the 18 hours also. I will easily be able to show HMRC that we are working these hours, because we are. Based on this, I  propose that the benefit in kind that is personally taxable is around 25% and subject to class 1A."

 

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By spilly
20th Feb 2019 23:32

Should be square footage surely? If the bedrooms and kitchen will not be used at all for the business, then those rooms must therefore be solely for private use.
Are they not allowing the staff to make a cuppa though?

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21st Feb 2019 07:03

I comment only on what I think "appropriate" might mean, not on the technical analysis.

I should think it "appropriate" to determine the attributable cost. For rent paid, why would that not be based on area? You don't pay more rent for Room A on the basis that you use it more than Room B; you pay more rent because it's bigger.

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21st Feb 2019 07:10

I'm with the two above contributors. In circumstances such as this I'm not convinced time is the relevant factor. It's more about area / square footage.
Think about it, making some assumptions, the bedrooms are not used for business use at all, they are always used for private use.

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22nd Feb 2019 12:59

If the directors each had a desk in their room which they worked at during the day, then the entire flat would be being used for business most of the time.

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22nd Feb 2019 13:12

Are spilly's cuppa comment and richard.snape's comment above meant to indicate dissent from HMRC guidance?

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25th Feb 2019 10:11

Perhaps look at it from the other angle.

If the brothers rented the property privately and then charged the Co rent under a licence for business use what would be claimed.

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to pauljohnston
25th Feb 2019 10:55

I suspect the contract is with the brothers. But the company is paying. Changes things a bit, doesn’t it? But, as ever, the OP seems to have melted away – and speculation is pointless.

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to Tax Dragon
25th Feb 2019 11:37

Tax Dragon wrote:

I suspect the contract is with the brothers. But the company is paying. Changes things a bit, doesn’t it?

How? Either its a pecuniary liability and an amount can be deducted to the extent that the employees are obliged to incur the expense and it is incurred wholly, exclusively and necessarily in the performance of the employees' duties, or it is a benefit in kind and an amount can be deducted to the extent that the expense (deemed by s 364) is an obligation of the employees and is incurred wholly, exclusively and necessarily in the performance of the employees' duties.

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to Tax Dragon
25th Feb 2019 12:07

Tax Dragon wrote:

I suspect the contract is with the brothers. But the company is paying. Changes things a bit, doesn’t it? But, as ever, the OP seems to have melted away – and speculation is pointless.

Sorry for melting. The contract hasn't yet been signed, but the intention is that the contract will be with the company, not the brothers, although this could be changed if necessary. Lease is supposed to start beginning of March.

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25th Feb 2019 10:24

"The flat is more like an office with beds in it, than a flat with an office in it."

Does the landlord agree with this?

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to Duggimon
25th Feb 2019 12:09

Duggimon wrote:

"The flat is more like an office with beds in it, than a flat with an office in it."

Does the landlord agree with this?

As far as I know, the landlord is aware and happy with the arrangements.

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to aiwalters
25th Feb 2019 18:59

And what about the local authority change of use department in planning permission?
And what about the local authority business rates department?

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25th Feb 2019 10:48

If all they do is work and sleep, I assume there is no TV in the flat and they have caterers provide meals, which they eat in the bedrooms. They also do not do their own laundry. Otherwise the other rooms are not used EXCLUSIVELY for the company's business and are by their very nature living accommodation which is available for the use of the directors and a BIK arises on the rent paid by the company (different rules if flat purchased or a lease premium paid). Is there a separate room used exclusively for business, i.e. never used for any other purposes? If so, what proportion of the rental paid for the flat relates to that room? The usual method is floor area for rent. Other costs such as electricity might be apportioned according to usage and when and where the lights and heating is on.

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By cfield
25th Feb 2019 12:21

The big problem is the strict application of the BIK rules for employer provided accommodation. The flat is not exempt as job-related accommodation as it is no more necessary for the proper performance of their duties than any other flat.

Nor does it qualify as accommodation on a business trip akin to a hotel, as they are doing more than staying there overnight whilst working. They are living there. Paragraph 21.25 of Booklet 480 excludes any claim for any accommodation used as a pied-a-terre.

Nor is there any scope for a business expenses deduction as they are not necessarily obliged to use the flat for business. They simply choose to do so in order to save money. Even if there was, they could not treat any of the rooms as being wholly and exclusively for their work, like a showroom, as there is domestic use too.

In any case, the tenancy is bound to be in their names, not the company's, so it isn't even employer provided. It is simply the discharge of a personal pecuniary liability. You can claim expenses for higher costs incurred due to working at home, such as power bills, but you would have to keep good records to prove it. Telecom bills would not be worth claiming as they are usually based on a monthly tariff, may include a fixed line rental and include TV too. Other than that, all they can claim is the tax free de minimis of £4 per week.

However, as Paul Johnston suggested, there is a much better way of dealing with this and that is to sub-let one or more rooms to the company on a license. They would need to get the landlord's permission but hopefully that should not be a problem for an informal license.

At a stroke, you sidestep the PAYE rules and substitute your director's hat for a landlord's hat. The tax rules are far less onerous for landlords. You can claim a fair and reasonable share of the household costs.

I sometimes call this the Einstein calculation as it is based on space and time. You also need to be Einstein sometimes to work it out in more complicated cases.

If the flat is being used for business as much as they say, this share of the household costs should be quite high. They will each put 1/3rd of the rent on their personal tax returns and claim 1/3rd of the calculated costs.

The rent charged to the company must be a commercial figure. In their case I would suggest the actual rent as it is being used by the company full time. Maybe even more as office space usually commands a higher rent. The company can claim the full rent against corporation tax but they will only pay income tax on the profit after deduction of expenses.

Accounts-wise, just credit the loan accounts with 1/3rd of the rent each and debit them with any rent, council tax or utility bills paid on their behalf by the company.

The only thing is they should draw up a proper license agreement, sign it contemporaneously and keep a timed electronic record by emailing it to each other. Also, the license should not be backdated, unless it was verbally agreed at the outset (always a bit dodgy). They should also knock up a board minute, just to authorise it.

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to cfield
25th Feb 2019 12:57

Thanks for the response. The tenancy hasn't yet started, so no need to back-date anything. Based on your response, it seems that it would be better if the contract was in the brothers' names rather than the company.

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to aiwalters
25th Feb 2019 14:50

Sorry, but I think (once you have your technical analysis straight) you still have to run the numbers. Remember that the brothers will have to pay the rent from net-of-tax income, so they will presumably need more (taxable) income to do that. There may be less of a difference than you might expect (it could just come down to a bit of NIC). That said, it’s likely to be much easier to keep on top of the admin (much less risk of getting penalties – and less of a downside to some private use of the sublet rooms) if the brothers rent personally.

(I am not disagreeing with other contributors, but be clear as to the pros and cons of each approach.)

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25th Feb 2019 16:27

If they are renting, perhaps the landlord could be persuaded to grant separate rental agreements for the business and residential parts of the premises.

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25th Feb 2019 16:55

If they and their (lucky) engineers never leave the flat, why does it need to be in London?

God knows what it will smell like after a month of continuous occupation by boys, pizza and takeaways...

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to WhichTyler
25th Feb 2019 17:06

It needs to be in London because that's where the engineers/programmers are based.

No comment on the second part of your post.

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