Can a payment by an employee towards buying or improving living accommodation be used to reduce its reportable value?

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The rather complex reporting requirements for the provision of living accommodation are set out in sections 97 to 113 of the Income Tax (Earnings and Pensions) Act 2003. The cash equivalent of the benefit consists of a "basic benefit" charge and, if the cost of providing the accommodation exceeds £75,000, an "additional yearly rent" charge.

The basic benefit charge, defined in section 105, is based on the actual or notional rental value of the property and the charge may only be reduced by payments made by the employee towards the rental costs. As a result, a payment towards the cost of buying or improving the property is not relevant to the basic benefit charge.

However, where the cost of providing the accommodation exceeds £75,000, there are specific provisions in sections 104 and 107 for reducing the "additional yearly rent" charge - a charge that is based, where the property is owned by the person providing it, on the cost of buying and improving it. There are two different methods of calculating this charge, as follows.

The normal calculation

The normal way of determining the cost of the accommodation is to find the total of

• the expenditure incurred in acquiring the property, and
  
  
• the expenditure incurred on improvements to the property.

The total of this expenditure may then be reduced by the amount of any payments made by the employee that represents

• the reimbursement of expenditure incurred in acquiring or improving the property, and
  
  
• consideration for the grant to the employee of a tenancy or sub-tenancy of the property.
  
  Example: If it costs £100,000 to acquire the property, plus £40,000 for improvements, and the employee paid £20,000 towards the cost of an extension, the cost of providing the accommodation would be £120,000.

The special calculation

However, this normal method of working out the cost of the accommodation does not apply if, at the time the employee first occupies the property, the employer has owned it for more than six years. A special rule applies in this situation. The cost of the accommodation is the total of

• the market value of the property on the date the employee first occupied the property, and
  
  
• the expenditure incurred on improvements to the property after that date.

Again, this total may be reduced by the amount of any payments made by the employee that represents

• reimbursement of expenditure incurred in acquiring the property, up to the maximum of the market value,
  
  
• reimbursement of expenditure incurred in improving the property, and
  
  
• consideration for the grant to the employee of a tenancy or sub-tenancy of the property.
  
  Example: If the employer had owned the property in the example above for more than six years at the time the employee first occupied the property and the market value at the time was £200,000, the cost of providing the accommodation would be £220,000, i.e. £200,000, plus £40,000 for the improvements, less £20,000 from the employee.

HMRC provides P11D Working Sheet 1 to help employers perform these special calculations.

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