Basically the test is based on ‘necessary’ and ‘customary’ https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim11300
The test is only satisfied where the employee can demonstrate that occupation of the particular property (as opposed to any other property) is essential to the proper performance of the duties of the employment.
Support for this view can be derived from Langley and Others v Appleby (53TC1), in which Fox J said at page 21
if it is asserted that it is essential for the servant to occupy the house in order to perform his duties, it seems to me that the servant must establish affirmatively that for the performance of his duties he must live in that house and no other.
The words “that house and no other emphasise the strict nature of the test.
An employee may claim that it is necessary to occupy a particular residence because the employer requires the employee to live there. This is not enough to satisfy the test. It must be shown that the duties of the employment require occupation of the residence. An argument that the employee cannot afford to live elsewhere is not sufficient, see Vertigan v Brady (60TC624).
Rent Allowances and Deductions
It is common for an employee to:
- own the property he lives in, or
- rent the property from a third party, not his employer.
In both cases the employer may pay the employee extra salary or a rent allowance to help with the accommodation costs. This extra salary or rent allowance will count as earnings under Section 62 ITEPA 2003
An employer may own or rent accommodation and provide it to an employee. If the employee is entitled to a fixed wage or salary from which sums are deducted by the employer in respect of the accommodation then the fixed wage or salary is earnings under Section 62 ITEPA 2003. No deduction is allowed from earnings for the deductions made by the employer. See Cordy v Gordon (9TC304) and Machon v McLoughlin (11TC83)