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Can a payment by an employee, who is provided with living accommodation by the employer, towards the improvement of that accommodation be used to reduce its reportable value?
The 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. As the basic charge, defined in section 105, is not related to the cost of buying or improving the property, the employee's payment does not affect the calculation of the basic charge.
However, there is specific provision in sections 104 and 107 for reducing the cost of the property, in most situations, for the purposes of calculating the additional charge. The additional charge applies where the cost of providing the accommodation exceeds £;75,000.
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 cost £;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.
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