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Note: This chapter contains an analysis of the old Schedule E living accommodation provisions. It is only relevant for years before 2003/4. Reference should also be made to Taxation of Foreign Domiciliaries, 2nd edn., Chapter 28 as some of the material there (not reproduced here) is also relevant for the earlier years.
THE FAMILY HOME BEFORE 2002/3: SCHEDULE E PROVISIONS
1. Benefit in kind problems of family home held by company
Section 145(1) ICTA 1988 provides:
...Where living accommodation is provided for a person ... by reason of his employment, ... he is to be treated for the purposes of Schedule E as being in receipt of emoluments of an amount equal to the value to him of the accommodation...
Section 146:-
(1) This section applies where:-
(a) living accommodation is provided for a person ... by reason of his employment,
(b) by virtue of section 145 he is treated for the purposes of Schedule E as being in receipt of emoluments ...
(c) the cost of providing the accommodation exceeds ,75,000...
(2) Where this section applies, the employee shall be treated as being in receipt of emoluments ... of an amount equal to the additional value to him of the accommodation...
It has now been established by the House of Lords in R v Dimsey & Allen 74 TC 263 that these benefits in kind provisions apply to a shadow director. In principle, if the company provides living accommodation for a shadow director, the result is a substantial income tax charge. The unfairness of this did not unduly concern the House of Lords because of the countering unfairness to the Revenue of the case where the services of a shadow director were as valuable as those of an actual director. It appears to be a case of two wrongs making a right to tax.
2. Sections 145 and 146 compared
The living accommodation charge is contained in two separate sections. This is for historical reasons, section 146 having been introduced by the FA 1983 to supplement the earlier provision. This structure makes the law in this area twice as complicated as it need be.
In brief, section 145 imposes a charge on "the value of the accommodation". In practice this is set as the gross rating value of the property under the old rating system (see Revenue Schedule E Manual paragraph SE11433). The amount is generally much less than the market rent.
Section 146 only applies where the cost of providing accommodation exceeds £75,000. This was a meaningful figure when the legislation was introduced in 1983 but inflation, the Chancellor’s friend, has whittled away the real value of this limit so it is now just a computational nuisance. The charge is in short on the "additional value of the accommodation" which is defined as the official rate of interest on the cost of providing the accommodation less £75,000.
3. Sure ways to avoid sections 145, 146
Sure ways to avoid ss.145 and 146 are
(1) to ensure that the occupier is
(a) not an officer or employee (which is straightforward); and
(b) not a "shadow director"; or
(2) not to use a company.
4. Who is a shadow director?
[Text superceded by Taxation of Foreign Domiciliaries, 2nd ed., para 28.9.]
5. Defences that property purchase was financed by the foreign domiciliary himself
The circumstances in which a company may purchase a home for a UK resident foreign domiciled individual will vary. Sometimes however a company structure is set up specifically for the purpose of purchasing the home. That is, under a pre-organised arrangement:-
(1) The individual has agreed in principle to purchase a property.
(2) The individual transfers the purchase price a trust.
(3) The trust incorporates a company and lends the purchase price to the company.
(4) The company makes a purchase.
This section considers whether these facts offer a further defence to the sections 145, 146 charge.
The following draws on Stephen Brandon’s important article "ICTA section 146 and Allen: Must the client throw in the towel" OITR Vol.9 page 135.
5.1 "Making good"
Section 145 provides:-
(1) Subject to the provisions of this section, where living accommodation is provided for a person in any period by reason of his employment, he is to be treated for the purposes of Schedule E as being in receipt of emoluments of an amount equal to the value to him of the accommodation for the period, less so much as is properly attributable to that provision of any sum made good by him to those at whose cost the accommodation is provided.
(Emphasis added)
Stephen Brandon argues in his article that in these circumstances the interest free loan "makes good" the provision of the accommodation. This will be a reasonably strong argument if the facts are as set out in the beginning of this paragraph.
5.2 Making good: the Revenue view
SE21120 provides:
SE21120. what is meant by ‘making good’
Section 156(1) ICTA 1988
"Making good" simply means giving something in return for the benefit. What is being made good is the expense incurred by the employer or other person providing the benefit. It follows that in order to make good that expense the employee will give money, or something which can be measured in money. Usually the employee will "make good":
by a direct payment or
by deduction from salary or
by a suitable debit to the employee’s current account in the employer’s books and records.
Any of these methods is acceptable.
The giving of services by the employee, or anything that is not measured in money terms is not "making good" B see Stones v Hall 60 TC 737.
This is correct. The Manual continues:
In any case where the taxpayer argues that an interest-free loan has been made to his employer specifically to make good the cost or value of a benefit, make a submission to Personal Tax Division, Solihull.
As regards "making good" by waiver of remuneration see SE21122.
SE21121. when must making good take place?
Section 156(1) ICTA 1988
The legislation does not set a time limit on the "making good". This will usually happen shortly after the expense is incurred by the person providing the benefit. But you need not object to a belated "making good" if it is done within a reasonable time of the employee becoming aware that the assessable benefit can be reduced, in whole or in part, by reimbursing the expense incurred by the provider.
What constitutes a "reasonable time" will depend on the facts of the case. Do not allow a deduction for "making good" which takes place after an assessment on the benefit concerned has become final and conclusive.
This is as generous a position as the law allows.
5.3 At whose "cost" is the accommodation provided?
"Making good" is not a defence to the section 146 charge.
Stephen Brandon goes on in his article to argue that the person "at whose cost" the accommodation is provided is the foreign domiciliary himself. It is certainly the case (on these facts) that the foreign domiciliary provided the cost indirectly. However section 146 does not expressly say anywhere that it is a defence to section 146 that a property is provided at the cost of the foreign domiciliary. A strongly purposive construction approach would be needed for the taxpayer to succeed here.
5.4 Reimbursement by the individual
Section 146(4)(5) provides:
(4) For the purposes of this section, the cost of providing any living accommodation shall be taken to be the aggregate of–
(a) the amount of any expenditure incurred in acquiring the estate or interest in the property held by a relevant person; and
(b) the amount of any expenditure incurred by a relevant person before the year of assessment in question on improvements to the property.
(5) The aggregate amount mentioned in subsection (4) above shall be reduced by the amount of any payment made by the employee to a relevant person, so far as that amount represents a reimbursement of any such expenditure as is mentioned in paragraph (a) or (b) of that subsection or represents consideration for the grant to the employee of a tenancy of the property.
(Emphasis added)
In some cases it may be argued that the payment made by the individual amounts to a "reimbursement" of the expenditure incurred by the company. Indeed one might specifically arrange that the company is reimbursed (or incurs no expense) so as to avoid the section 146 problem. Unfortunately this in itself will not avoid section 145.
6. Some other defences to sections 145, 146
6.1 The caretaker’s defence
Section 145(4) provides:-
Subject to subsection (5) below, subsection (1) above does not apply to accommodation provided for the employee in any of the following cases–
(a) where it is necessary for the proper performance of the employee’s duties that he should reside in the accommodation;
(b) where the accommodation is provided for the better performance of the duties of his employment, and his is one of the kinds of employment in the case of which it is customary for employers to provide living accommodation for employees;
It has been suggested that one can use this to avoid the charge. The idea is to enter into a contract whereby the beneficiary who is to occupy the property does so as caretaker for the trustees. Is the idea laughable? The Revenue may not see the funny side and do not accept the scheme works. The Revenue Manual provides:-
SE11342. Living accommodation exemption: necessary for proper performance of the duties. Types of employee
There is an exemption from the provided living accommodation charge where an employee can show that it is necessary for the proper performance of the duties that the accommodation is resided in (see SE11341).
The following types of employee may be accepted as being within the exemption.
... Caretakers (living on the premises). This only covers those with a genuine full time caretaking job. It would not cover a shop employee who is allowed to live in the flat above the shop because the employer thinks this will discourage burglaries of the business premises.
While it may normally be necessary for a caretaker to reside in accommodation, a person does not become a "caretaker" just by being labelled as such. If the beneficiary is occupying an extremely valuable property with only nominal caretaking duties, then this is not the same "kind of employment" as a normal caretaker.
6.2 Payment of rent
Will the payment of rent solve the ss. 145 and 146 problem? It will count as "making good" for s.145. Section 146(2) ICTA 1988 provides (in short) that
Where section 146 applies, the employee shall be treated as being in receipt of emoluments ... of an amount equal to the additional value to him of the accommodation less rent paid in respect of the accommodation.
(Emphasis added.)
This proposal raises Schedule A problems. Also, to avoid the s. 146 charge, the rent would have to equal the "additional value". That is calculated as the official rate of interest (under s. 160 ICTA 1988) on the cost of the property less £75,000. This may exceed the market rent, especially for very valuable properties.
6.3 Property owned jointly by individual and company
Another strategy is to arrange that the individual owns a small share in the property. The argument is that he occupies the property as co-owner and the company does not "provide" accommodation. A full discussion is outside the scope of this book. If correct, this also allows tax avoidance in relation to s.87 TCGA 1992 and s.740 TCGA 1992. However good the technical argument, it is "too good to be true". This cannot be viewed as safe tax planning. The argument is supported by dicta in Essex v. IRC [2002] STC (SCD) 39 (but the case is under appeal).
The Revenue approach is set out in SE11414:
SE11414. Living accommodation: avoidance area. co- ownership cases
In these cases the employer and employee co-own the living accommodation. The usual arrangement is that the employer and employee own the property as tenants-in- common through a trust.
A tenant-in-common has a legal right to use 100% of the property 100% of the time even though a tenant-in-common may only own a much smaller interest in the property (say 30%). It is argued against us in such a case that the employee’s rights to use the living accommodation come from the employee’s legal rights as a tenant-in-common. So no living accommodation can be said to be "provided by reason of the employment".
We have arguments in favour of there being a Schedule E charge. It depends on the facts of the case as to how strong our arguments are. Please submit to Personal Tax Division, Solihull any case on which you want to argue the point. Your submission should include a copy of any trust deed under which the land is held.
If the Revenue lose on this point (which the author regards as unlikely) the law will in due course be changed.
6.4 Lease premium scheme
The Revenue Manual provides:-
SE11415. Living accommodation: avoidance area. lease premium cases
In these cases the employer takes a short lease on living accommodation from a third party. Instead of just paying the market rent for the property the employer pays a large premium and a small annual rent. It is argued against us that none of the premium can be treated as rent for the purpose of measuring the Schedule E living accommodation charge.
An example will illustrate the point. A London flat owned by a third party has a market rental value of £25000 per annum and Gross Rateable Value under the old rating system of £800. An employer enters into a 3 year lease with the third party paying a premium of £75000 and a rent of £100 per annum. The employer then provides the flat rent free to an employee. The Schedule E charge is on the higher of
The Gross Rateable Value, or
Actual rent payable.
It is argued against us that the measure of the Schedule E living accommodation benefit is £800 Gross Rateable Value because none of the £75000 can be treated as rent.
We have arguments that the premium should be treated as rent. Please submit to Personal Tax Division, Solihull any case on which you wish to argue the point.
7. Non-UK situate accommodation
Richard Bramwell QC argued that the s.145, 146 charge does not apply to property outside the UK. He says:
S.837(1) applies only to UK land because:
(a) subsection (2) is intelligible only on that basis;
(b) the history of s.837 shows that, when first enacted, the inference created by subsection (2) was specifically confirmed by the jurisdiction provision in FA 1963 s.30, and the meaning to be given to subsections (1) and (2) cannot have altered by the process of consolidation and re-enactment.
Hansard confirms this interpretation to have been the understanding of Ministers.
...
Section 145 operates through the definition of annual value in section 837: see subsection (2). Accordingly, if it is correct to say that section 837 has no application to overseas properties, then likewise section 145 has no such application. As to section 146, this operates through section 145 (subsection (1)(b)), so this too fails to bite.
It is considered that this anomaly would be too much for a Court to swallow. But if one were already litigating, say, a shadow directorship point, then here is another point to throw in the pot. The Revenue do not agree and the argument is unlikely to be resolved below the level of the Court of Appeal.
8. Interaction of benefit in kind rules and Schedule E remittance basis
This section deals with the position of a UK resident but foreign domiciled individual who is an employee, director, or shadow director and receives benefits in kind.
R v Dimsey & Allen 74 TC 263 makes it plain that the benefit in kind charge falls under paragraph 1 of Schedule E (and not paragraph 5, which might have been regarded as a contender). The question arises whether the benefits are taxable under Case I or III.
Emoluments are taxable under Schedule E, Case III (rather than Case I) if:-
(1) the duties of the office or employment are performed wholly outside the United Kingdom; and
(2) the company is resident outside the United Kingdom.
See ? (The foreign domiciliary exemption to Case I charge).
It is suggested (though the contrary might be arguable) that in this context the "duties" of the office of a shadow director are the "instructions or directions" which he gives to his company. Accordingly, if the shadow director gives his instructions or directions outside the United Kingdom, and the company is not UK resident, the emoluments fall to be charged under Case III and not Case I of Schedule E.
If Case III applies (not Case I) the charge arises only as far as the emoluments are "received in the United Kingdom". It is suggested that the benefit of living accommodation is "received" here if the accommodation is here.
The Revenue agree with this view. Schedule E Manual 40303 provides:
Case III of Schedule E: "received in the United Kingdom": benefits in kind
Certain types of emoluments are not capable of being "received" in the normal sense. Examples of such emoluments are:
the value of living accommodation, or
for directors and employees with emoluments at a rate of £8,500 a year or more:
o the benefit of a loan
o the provision of a car available for private use
They can however be "used or enjoyed" in the United Kingdom, and can therefore be regarded as received in the United Kingdom (see SE40302).
As regards the calculation of emoluments for the purpose of the £8,500 test in the case of an employee assessable under Case III of Schedule E, see SE21115.
If the accommodation is outside the United Kingdom, and the occupier of the property is UK resident but not domiciled, and falls within Case III, then the benefit is received outside the UK and is outside the scope to tax.
9. Non-resident individual
This section deals with the position of a non resident individual who is an employee, director or shadow director and receives benefits in kind. Emoluments are taxable under Case II only in respect of duties performed in the UK. Case I and III do not apply. If the individual is merely a shadow director, it is arguable that he has no "duties" and therefore cannot be subject to tax under Case II at all. However, the Revenue would have a fair argument that the "instructions or directions" which a shadow director gives amount in this context to his "duties". The passage from the Manual cited above suggests that this is the Revenue view.
If all the instructions or directions are performed outside the UK, then the non-resident shadow director cannot be subject to tax under the benefit in kind provisions.
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