By The Association of Taxation Technicians (ATT) Last Updated 19th October 2020
Since the outbreak of COVID-19 homeworking has become the norm for many millions of people.
A common concern is what, if any, recompense employees can get for any additional costs as a result of their new arrangements.
In general, the starting point is to look at the existing rules for homeworking, which have been around for some time, but there are also covid-specific concessions to consider.
This article covers:
- What homeworking expenses employers can reimburse tax-free.
- The tax reliefs that employees can claim – including some covid-specific provisions.
- Specific issues regarding the provision of office equipment.
Option 1: Employer reimbursement of costs
From 2003, employers have been able to make tax-free payments to help employees cover their reasonable additional expenses incurred while working from home. Eligible payments are not subject to either income tax or national insurance.
Which employees are eligible?
To be eligible, the employee must be carrying out the duties of their employment under homeworking arrangements. This means that the employee is regularly performing some or all of their duties at home.
HMRC guidance notes that they will accept an employee is working at home regularly where it is frequent, or follows a pattern, such as working at home for two days of every week. In the example of an employee working two days a week at home, HMRC will still consider it to be regular even if the employee varies the days which they work at home each week.
Informal working at home which is not by arrangement does not count as homeworking – for example taking work home in the evenings will not qualify the employee for tax-free reimbursement of costs. There must be an arrangement to work at home and not at the employer’s premises, and it is good practice for this to be in writing.
During the COVID-19 pandemic, HMRC will accept that employees working from home because their employer’s offices have closed – or because the employee is following advice to self-isolate – meet these requirements. Newly home-based employees will be eligible to receive the allowance tax free from the date that their employer agreed they could work from home, or from when the initial government advice to work at home was announced in March 2020.
What costs can the payments cover?
The reimbursements can only cover reasonable additional costs incurred by the homeworking employee. There are two main approaches.
Firstly, the employer can pay the following fixed amounts:
- £6/week for weekly paid employees (£4/week prior to 6 April 2020); or
- £26/month for monthly paid employees (£18/month prior to 6 April 2020).
The advantage of paying at these rates is that there is no need for the employer to justify the expenditure and the employee does not need to keep records of their additional costs.
The weekly, flat-rate amount applies equally to part-time workers and it is not necessary to pro-rate it because the employee does not work at home full-time.
If the flat-rate is not appropriate, then a larger tax-free amount can be paid subject to provision of evidence for the additional costs. There are two ways to do this.
The first approach is to calculate a scale rate payment which reimburses the average additional costs of working at home. It is possible to agree to increase this annually. Once the scale rate has been established following HMRC guidance, then employees are not required to keep subsequent evidence of costs.
In practice, we do not expect HMRC to have the resources to agree scale-rates during the COVID-19 outbreak.
Alternatively, the employer can reimburse the actual additional costs incurred by the employee. Allowable costs include:
- additional heating and lighting costs
- additional insurance
- metered water
- telephone or internet access charges
- business rates (if applicable)
Only the increase in costs incurred by the employee can be reimbursed. Costs that would be the same whether or not you work at home cannot be included. Such costs might include:
- mortgage interest or rent
- council tax
- water rates
For costs such as broadband internet connection, HMRC say that if the employee is already paying for a connection before starting working from home then this is an existing expense and cannot be reimbursed tax-free. If, however, the employee is not connected to broadband and needs a connection to work from home, then this would qualify as an additional cost which the employer could reimburse tax-free.
The same principles will apply for the cost of a domestic landline rental. Only additional costs incurred by the employee as a result of homeworking can be reimbursed by their employer tax-free.
The employer is also not permitted to reimburse tax-free any costs that put the employee in a position to work at home such as building alterations. However, the employer can provide office equipment and office furniture. These would be tax-free benefits in kind. (Although see below for tax issues that can arise where the employee provides their own equipment.)
Option 2: Employee seeks tax relief
If an employer does not choose to reimburse some or all of the homeworking employee’s extra expenses, then under the existing rules the employee is not automatically allowed tax relief on their extra costs. Tax relief for extra costs is only given if such costs are incurred wholly, exclusively and necessarily for the employee’s work.
Which employees are eligible under the usual rules?
In order to claim tax relief for homeworking costs, the usual rules are that an employee must show that their home is a workplace. HMRC will accept that a home is a workplace where:
- The employee performs substantive duties at home. Substantive duties are the tasks that employees must carry out which form all or part of the central duties of their employment.
- The duties require the use of appropriate facilities and such facilities are not available to the employee on the employer’s premises. (Or the employee lives so far away from the premises it is unreasonable to expect them to travel there on a daily basis.)
- At no time before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.
While the first two of these conditions are likely to be met by employees homeworking as a result of COVID-19, it was not immediately clear whether HMRC would consider the third to have been met during the pandemic.
Temporary relaxation during the pandemic
On 27 March 2020, the Financial Secretary to the Treasury suggested in a written parliamentary answer that HMRC might take a more lenient view on tax relief for homeworking expenses during the pandemic for those employees who do not meet the strict definition of home as workplace and whose employers will not make any contribution to their costs.
In October 2020, further clarification from HMRC was supplied to the ATT and other professional bodies to confirm that relief will be available for individuals who are working at home on a regular basis for all or part of their time as a result of coronavirus. We understand that this relaxation to the usual tests will apply for 2020/21 (and we presume also to the short period at teh end of 2019/20 when the Government first advised mass homeworking), as long as the employee is not working at home by choice.
HMRC is emphasising that it is not possible for employees to simply decide to work from home in light of the Government’s advice. There must be a discussion with the employer and, if the employer decides that the employee should wokr from home, the deduction will be available.
For example, if the employer cannot accommodate the employee in the office because of social distancing, then the employee would be entitled to claim. But where the employer offers the employee the option to return to work but the employee chooses to remain at home, the deduction is not available.
What costs can the payments cover?
An employee who either meets the usual rules, or falls within the temporary relaxation of regular home working as a result of coronavirus, can claim relief for the following expenses. With the exception of insurance, are very similar to the costs that can be reimbursed by their employer above:
- additional heating and lighting
- metered water
An employee cannot claim relief for the following expenses:
- mortgage interest or rent
- council tax
- water rates
Where, as is often the case, it is not practical to calculate the allowable extra costs, then a claim for £26 per month (£18 per month prior to 6 April 2020) for monthly paid employees or £6 a week (£4 per week prior to 6 April 2020) can be made without having to justify the figure. This does not cover the cost of business calls, for which an additional claim can be made based on actual costs. This is confirmed in a recent update to HMRC’s manuals at EIM32815.
Where the employee works from home some, but not all of the time – for example they work at home three days a week and in the office two days a week – they can still claim the full £6 a week deduction. There is no need to scale it back just because the employee is not working at home on a full time basis.
Where the employer pays some contribution towards homeworking expenses, but not the full £6 a week or £26 a month, then the employee can seek tax relief for the difference.
How to make claims:
An employee can make a claim:
- Online, with the new P87 micro-service which was launched on 1 October 2020
- By phone
- By post
- Or, if they are registered for self-assessment, through their tax return.
Claims for the homeworking allowance for 2020/21 can be made through the new micro-service even before the end of the tax year on 5 April 2021. HMRC have said that they will apply the relief for the whole year even if the employee then returns to the office before 5 April 2021.
Claims for homeworking allowances will not be automatically rolled forward into 2021/22 and it is not currently HMRC’s intention to extend the modified approach being applied to claims in 2020/21 to 2021/22. Anyone claiming homeworking allowance for 2021/22 will need to meet the usual conditions.
Purchases of Office Equipment
It is generally accepted that working solely on a laptop for long periods is poor practice, and can lead to discomfort and back pain. Many homeworkers will need additional equipment including monitors, keyboards and even desks and chairs in order to make a functional office space at home. Fortunately, following an announcement on 13 May 2020, some of the unintended outcomes which could arise here have been dealt with by the Government.
If the employer has purchased and provided any necessary equipment then, provided there is no significant private use, no taxable benefit in kind arises on the employee.
(If there is significant private use, then a benefit in kind will arise and so employers may wish to ensure that their employment policies make clear that significant private use is not permitted.)
If, at a later date, ownership of the asset is transferred from the employer to the employee then a benefit in kind could arise.
Employee purchase and employer reimburses
In some circumstances, employees may have purchased their own equipment personally in order to get set up as soon as possible. Employers may even have advised this, and offered to reimburse the costs afterwards.
Usually, employer reimbursements of employee expenses are treated differently for tax purposes and this approach involving a subsequent reimbursement is normally taxable on the employee. This is clearly unwelcome, and therefore the announcement on of a temporary exemption from income tax and national insurance for such reimbursements is very welcome.
The relevant legislation took effect on 11 June 2020 and introduces a temporary measure for the period to 5 April 2021. Using their discretion, HMRC are treating the exemption as applying from 16 March 2020. Under the provision, any reimbursement by an employer for the cost of equipment is exempt from income tax and national insurance as long as it:
- was provided for the sole purpose of enabling homeworking as a result of coronavirus, and
- would have been tax exempt if provided directly by the employer.
Furthermore, any private use of the reimbursed equipment should not be significant.
As this exemption has been laid under powers provided for by section 210 of ITEPA 2003 (power to exempt minor benefits) – and equivalent sections for NICs – any exemption is conditional on the benefit being made available to all an employer’s employees generally on similar terms. Therefore, employers should ensure that similar reimbursement terms apply to all employees that need to work from home. It will not, for example, be acceptable for directors to ensure that they are reimbursed for office equipment but other staff are not.
If at some point in the future the employee returns to work and retains the equipment, HMRC have confirmed via guidance that no benefit in kind will arise at that point.
Employee purchases but employer does not reimburse
If the employer is unable or unwilling to reimburse the cost of equipment or office furniture, then employees will need to see if they are able to satisfy the conditions to claim tax relief through capital allowances.
This requires them to demonstrate that the equipment is used in the performance of their duties. Under current HMRC guidance, they are likely to struggle to obtain relief under capital allowances for office furniture.
This is because office furniture such as desks and chairs put the employee in a (more comfortable) position to do their duties. The items are not used in the actual duties themselves in the way that a laptop or printer would be. The Low Incomes Tax Reform Group in particular are urging caution here.
Accordingly, tax relief from HMRC is unlikely for the costs of office furniture and employees may wish to seek reimbursement from their employer. But tax relief for office equipment used in their duties is possible although employer reimbursement remains the better option.
Claims for office furniture cannot be made through the new online portal (microservice).