HMRC has announced that legislation will be enacted to stop, with effect from budget day, avoidance of income tax through the provision of accommodation to employees through so-called ‘lease premium’ arrangements. These arrangements have been particularly popular with employers of inbound expatriate employees whose stay in the UK is to be longer than 2 years.
Baker Tilly analysis
What is surprising is that it has taken so long for this change to be made. Lease premium arrangements have been very widely used among employers, particularly those with large inbound expatriate populations whose assignments exceed two years (those within that limit can generally be provided with accommodation tax free), and HMRC’s dislike of them has been common knowledge for several years. Against the background of the other recent changes to the taxation of non UK domiciled individuals, including such international assignees, this action could be seen as a further disincentive for talented people to come to the UK to work.
In detail
Employees who are provided with accommodation by their employers generally suffer an income tax charge based on the value of the benefit. On rented property this is generally measured by reference to the rent paid during the relevant period.
Under a lease premium arrangement a residential lease is acquired by the employer for a one-off upfront capital payment, instead of a conventional monthly rent. A loophole in the legislation means that such capital payments are not taken into account in measuring the employment benefit – meaning that such accommodation can be provided with minimal income tax on the employee.
The legislation announced today will close this loophole by providing that where such a lease is taken out for anything less than 10 years the “premium” will be deemed to be a payment of rent (the premium will be spread over the duration of the lease) and this amount will be the basis of the calculation of the employment related benefit.
The new rules will not be retrospective, they will apply to any new lease premium arrangements entered into, or extended, from today.