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Tax Relief and Home Working

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.

Home

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:

  1. 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. 
  2. 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.)
  3. 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
  • insurance

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.

Full details are available from GOV.UK and HMRC has a tool, to help guide employees to the most appropriate method for their circumstances. 

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.

Employer purchase

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).

Managing Your People Effectively in the Post-Pandemic Era
September 11, 2020
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By Tim Boag

The coronavirus lockdown has forced millions of employees to adapt to socially distanced working arrangements and working remotely – a trend many expect to continue well after the pandemic subsides.

Multinational businesses such as Facebook and Twitter have already moved towards making working from home the norm, a shift enabled by technology and telecommuting.

For small to medium-sized enterprises (SMEs) in the UK, who may not have the resources of larger firms, hybrid or blended working is more likely to become the new normal, where employees split their time between the office and home.

Managing colleagues remotely can be challenging. Homeworking can cause mental stress, video call fatigue, burnout and a craving for ‘real’ human interaction.

These factors are exacerbated by the added worry of the pandemic. In this climate, leaders need to establish how they can best manage their workforce, maintain good levels of productivity, and care for their employees’ mental and physical wellbeing.

Below are some useful tips to help manage your business during this challenging time:

Keep in regular contact with stakeholders and customers

SMEs should prioritise frequent communication with key stakeholders, whether they are colleagues or customers. Although face to face interactions are difficult right now, video conferencing tools – such as Zoom, Microsoft Teams, Skype, and Google Hangouts among others – make it easy to keep in touch with your stakeholders.

Instant messaging apps such as WhatsApp and Skype offer an even quicker way to communicate updates and information to stakeholders. Finding the right communication tool can often be a case of trial and error but it’s important to find the right one for your business.

Encouragingly, Aldermore’s recent research found that 30% of SMEs had actually increased the amount they communicate with customers and clients during the pandemic.

Of course, while frequent communication is crucial for maintaining employee morale and keeping on top of workloads, it’s important not to go overboard and inundate your people.

Find out what frequency works best for your organisation. If daily calls are causing fatigue among employees, switch to having them every other day or even weekly.

Embrace technology

Communicating well with stakeholders from home often relies heavily on technology. Aldermore’s research found that one in five (20%) SMEs wanted more guidance on how to improve the technological capacity of their business.

One simple way of improving capabilities, is to provide employees with the necessary IT tools – whether that means providing training, a sufficient laptop, a monitor, mouse or headphones, they should have the tools they need to work from home effectively.

Technology can also play an important role in improving interactions between a business and its customers. To ensure our brokers and SME customers were backed throughout this crisis we fast tracked the launch of our online broker portal, Asset Backer, to all our intermediary partners. Asset Backer offers an electronic, paperless end-to-end process, which allows businesses to continue working with customers remotely.

Have robust cyber security measures in place

Mass working from home has created more opportunities for fraudsters to target companies and their customers. Since February for example, over 2,100 COVID-19 related scam cases have been reported to Action Fraud.

Given the heightened risk, it is important companies have robust security measures in place to protect their business. Even simple steps such as reminding employees to regularly change their passwords and keeping their laptop locked when not in use, can go a long way to protecting a business.

Employee wellbeing has to be the number one priority

During this pandemic, it is crucial that businesses focus on the wellbeing of their people. Leaders need to be even more conscious of someone’s personal circumstances and show flexibility towards them, for example allowing those with childcare commitments to flex their working hours.

Keeping morale high can be difficult in these challenging times, but organising virtual coffee catch ups or quiz evenings can go a long way towards boosting spirits. As humans we all need that social interaction, sense of belonging and shared identity that has been put under pressure by lockdown.

As the economy emerges from the gloom of the pandemic, businesses leaders must face up to the prospect that a large proportion of their colleagues may want to continue working at least part of the time out of the office.

When managing a workforce at a distance, it is vital that leaders keep in frequent contact with their stakeholders, embrace technology, monitor and respond to the wellbeing of their employees.

By doing so they will be able to reap the benefits, including increased productivity, improved employees’ morale and enhanced efficiency.

Tim Boag is group managing director of business finance at Aldermore

Why Providing Flexibility Could Cost Companies Dearly
September 8, 2020
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BY Musab Hemsi

There is no doubt that the COVID-19 pandemic has drastically accelerated the shift towards more flexible working practices across the economy.

Remote working was a simple necessity at the start of the pandemic, but it’s clear that many of the habits we’ve adopted during this period are here to stay.

For employees, this brings many benefits, with better work-life balance, more free time and less money spent commuting. Meanwhile, employers may be able to reduce their reliance on expensive office spaces.

However, many employers will not be aware of the potential legal implications of how they handle requests for flexible working as we look beyond the pandemic. Here’s what employers need to know.

In 2014, the rules on flexible working were changed to enable employees with over 26 weeks’ service to request a change to their working hours, the times they work and their place of work.

This legal framework is underpinned by a statutory regime, which requires employers to formally decide on any request for flexible working within three months of receiving a request. This process can be extended by agreement with the employee.

Legally, there are only a handful of reasons an employer can refuse a request for more flexible working. These mostly relate to an impact on customers, colleagues and their ability to carry out the work within the new arrangement.

However, many employees will have found that their ability to carry out their work has not been compromised while working remotely during the pandemic. In fact, many have reported an increase in their productivity, with more flexible working arrangements. In light of this, employers should be aware of the possibility of appeals if they refuse applications on these grounds.

Another legal nuance employers should be aware of is that mishandling requests for more flexible working could expose them to unlawful discrimination claims.

This is especially true in relation to employees who have childcare or disability issues that restrict their ability to work in accordance with traditional working practices.

If a decision to refuse flexible working arrangements to an employee has even an unintended effect of discriminating against that employee based on a protected characteristic, employers may find themselves in hot water.

For example, refusing a disabled employee the ability to work flexibly may count as unlawful discrimination if the employer’s premises are not designed to accommodate wheelchair users.

It’s therefore key to have a positive dialogue with employees who request flexible working and to understand their reasoning. This results in both better outcomes for the employee and protects the employer from the risk of potentially costly and time-consuming legal consequences.

Ultimately, employers should work to ensure that they have a robust and comprehensive system in place to handle requests and ensure that managers are well-placed to take decisions with proper business rationale, while enabling employees to set out their case for flexible working.

Unfortunately, we find that many employers approach flexible working requests with a closed mind. This is usually an error, and employers would be far better off maintaining a constructive dialogue with employees who make flexible working requests and trying to accommodate their requests.

The COVID-19 pandemic has opened the eyes of many businesses to the potential of drastic changes in working practices without compromising on the quality or quantity of work. As we look to the future, employers would be wise to consider the potential of embracing flexible working in a way that benefits both the employer and their employees.

Musab Hemsi is partner at LexLeyton

Top 10 Communication and Collaboration Tools
July 28, 2020
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Apps and other software tools can enable improved communication and collaboration within the workplace – here’s a guide to ten of the best.

By: Francesca Cassidy
collaboration tools

Never has it been more important to be able to collaborate and communicate remotely. The coronavirus outbreak has completely disrupted how we work, and those organisations without the proper tools will suffer. Luckily, there are more tools than ever before to choose from.

01 Slack

What began as a messaging tool for video game developers has evolved into the full-service collaboration platform we now call Slack. It is an easy-to-use messaging service and integrates with popular services such as Twitter and Dropbox. Conversations or channels are organised by topic of which you can have as many as you like. The design is slick and simple, and you can share any file type (including photos and videos) with colleagues in a fraction of the time it would take to email them. (Interestingly, teams who use Slack claim to see an average 48.6 per cent reduction in internal email). It also has video call functionality for up to 15 participants, for those days when you need to see your fellow workers’ faces.

02 Cisco WebEx

This video conferencing giant was formed in 2007 and one of the biggest players in the space (it is one of the most widely-used online meeting tools in the world.) WebEx’s major selling points include its high quality, designed to make users feel as though they are in the room with their colleagues. Users can host and join meetings, share screens and documents and easily pass control between team members when giving presentations or writing on virtual white boards. Typically used for team collaboration, webinars, training and customer support, it is now a crucial tool for organisations working from home.

03 Zoom

Labelled the “business story of 2020”, remote conferencing company Zoom has been one of the few real success stories amid the global pandemic. The cloud-based service combines video conferencing, online meetings, chat and mobile collaboration. Currently the second-most downloaded app in the world, its stock has soared while the markets plummeted, fainting more than 100 per cent since the beginning of the year. Its main pros are clean, high-quality audio and video, calls can be recorded for future review, screens can be shared with ease, and events can be scheduled, exported to calendars and guests invited, so no one in your team need ever miss a call.

04 Microsoft Teams/Office 365

Technology heavyweight, Microsoft, is another oft-cited purveyor of collaboration and communication tools worthy of respect. For collaboration, there is Office 365 with its unsurpassed range of features. The cloud-based solution offers all the traditional word processing, spreadsheet and slide-show capabilities, and lets multiple people edit the same documents in real time. Microsoft’s video conferencing offering, Teams, now comes bundled in with lots of Office 365 packages, and helps streamline remote communication through high-quality virtual meeting rooms.

05 G-Suite

Google’s full gamut of cloud computing and collaboration tools. The true value of G-Suite is simply the comprehensive range of interconnected tools – from email and calendar, to docs and sheets, to video conferencing with Google Hangouts. Perfect for startups and SMEs, these collaboration tools are free to use, with supplementary business features for when your company needs an extra level of customisation. Truly collaborative, team members can view each other’s calendars, communicate via chat, and work on documents at the same time.

06 Asana

Founded in 2008 by Facebook co-founder Dustin Moskovitz, Asana is designed to help teams organise, track, and manage their workloads, making it easier to work on projects together. Slickly designed, this software-as-a-service allows teams to create projects, assign work to teammates, set deadlines, and chat about specific tasks, all in one place. It also comes with a suite of reporting tools to help members monitor project progress.

07 Trello

This web-based project management application was designed to make project collaboration as simple as possible. Overarching projects are set up as boards and members can add cards for individual steps or tasks, assigning them to those involved, prioritising, and adding timelines. Flexible, easy to use and visually attractive, it can be used across a range of sectors, from software project management and web design to law office case management and lesson planning.

08 Harvest/Forecast

Harvest is a web-based tracking tool, which allows you to monitor the time and budget your team members spend on individual projects or tasks. It also has invoicing and reporting capabilities so that clients will receive automated payment reminders rather than managers being required to chase via email. Harvest’s complementary application, Forecast, is a visualisation tool which helps teams map out plans so that you can check how available coworkers are at a glance. The perfect collaborative replacement for lengthy spreadsheets.

09 Powwownow

Telecommunications company Powwownow may have invented the future of conference calling. Available 24/7, they offer instant, hassle-free communication with your colleagues, wherever they are in the world. The major benefit is a cost saving, as you can conference call globally, without being hit with the bridging fees common to other providers. The in-built web meeting tool allows you to share screens and notes, take feedback, and record important meetings, so no vital decisions slip through the cracks.

10 Ryver

Another top-rated messaging platform, Ryver aims to help organisations communicate better. You can create as many teams as you want and categorise them easily, and conversations can be set up with individuals, small groups or whole teams. A set of filters allow you to control who sees what you say and post in the app, and specific posts can be marked if you want to come back to them later on. Finally, all company posts can be found in a Facebook-style newsfeed, so you never miss an important message – or deadline – again.

Author Avatar
Francesca Cassidy
Wave of Flexible Working Requests Predicted

HR directors expect 70% of their workforce will have flexible working once coronavirus restrictions are lifted, a 45% increase on current levels.

More than 13 million people across the UK plan to ask their employer for changes to their long-term working pattern, according to research from Direct Line Life.

HR is therefore already preparing to receive more flexible working requests once the pandemic has eased, with over two fifths (43%) of HR directors giving the option to work from home five days a week. 

Cost of travel and being at work was a key reason behind changing working styles for around a third (31%) of people, as well as commuting time at 23%. 

More than a quarter (28%) of those hoping for more long-term flexible working said they have demonstrated they can do this successfully during the pandemic, a sentiment no doubt shared up and down the country. 

Spending more time with family and wanting to lead a healthier lifestyle was also cited as a key reason for the change.

One in six said they were concerned over pollution levels and 5% said they plan to spend more time exercising and becoming healthier. 

Chloe Couper, business manager at Direct Line Life insurance, said coronavirus has changed the mindset of millions of workers in the UK. 

She said: “Many people wouldn’t have considered their employer would accept a flexible working request, despite it being legal to make one but now companies and employees have become used to home working as the ‘new norm.’ 

“Going through such a serious pandemic will understandably make some people want to reassess their lives and priorities going forward. Protecting health and family are vital and it is great to see so many wish to spend more time doing both.” 

Working from home two days a week was the most popular option when looking to carry on flexible working arrangements.

Given office space is a large cost for most businesses, the opportunity for more staff to work remotely may reduce overheads for organisations. 

Research was collected by Opinium among a nationally representative sample of 2,002 UK adults in April and by Pure Profile of 100 UK HR directors.

Employers Must Provide Flexibility to Support Ageing Workforce
July 2, 2020
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The following article by Rachel Muller-Heyndyk, was published in HR Magazine

The government has called on employers to make accommodations for older employees, with research revealing support for more flexible and part-time role

The research, commissioned from Saga Populus, found that when asked what measures employers should implement to make workplaces more welcoming, respondents most commonly cited offering part-time roles (73%). Additionally more than three in five (63%) suggested that employers need to get better at offering training and retraining schemes to help older workers with upskilling and new technology.

More than three-fifths (65%) felt that an ageing and diverse society is a positive thing that should be celebrated.

However, they were mindful of some of the challenges this also presents. For example, nearly nine in 10 (87%) over-50s were aware that health and social care services need to be redesigned to support an ageing population. They believed the cost of this must be borne across all generations, with three-quarters (75%) stating the need for people of all ages to take increased responsibility for planning and preparing financially for living longer.

The research was commissioned as part of the government’s Ageing Society Grand Challenge, which is calling for businesses to promote the benefits of hiring older workers and to recognise that flexible working arrangements are key. As part of the strategy, the government is investing £300 million to develop technologies to support the ageing workforce.

Patrick Thomson, senior programme manager at the Centre for Ageing Better, said that flexible working could allow older workers time for care responsibilities and personal health needs. Read more

What You Need to Know About IR35 and the Tax Implications
May 7, 2020
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ARTICLE BY: By Jonathan Amponsah CTA FCCA, – The Tax Guys 

Although the government announced a delay to the introduction on 17 March 2020 (due to Covid-19), it’s still important to understand the implications and the options available.

Let look at eleven key areas that contractors need to think about in regards IR35 and the tax implications that are coming. They’ll also be useful to review for HR departments who want to ensure that people undertaking work for their organisation are compliant:

1. Back to Basics

Despite the complexity of the IR35 rules, it is important to note that nearly all IR35 cases go back to the basic principles laid down in a 1968 tax case called ‘Ready Mix Concrete’. In the latest high-profile BBC cases, the Tribunal went through the three key principles of Mutuality of Obligations, Substitution and Control.

So the first thing to do before you throw in the towel and assume you are caught by IR35 is to test your working arrangements against these principles and ask yourself the following questions: Can I send in another person (substitute) to work on my behalf? Can I refuse to work and is my end client obliged to offer me work (mutuality of obligation) and what degree on control is exerted on how I do my work?

2. Release of a new CEST Tool

HMRC has released an enhanced version of the CEST (Check Employment Status for Tax) tool [https://www.gov.uk/guidance/check-employment-status-for-tax]. It is understood that this tool has been rigorously tested against case law and settled cases by the taxman. HMRC promise to stand by the results produced by the tool provided the information entered is accurate. So, if you’re not sure, simply take this test or engage a specialist tax adviser to provide you with formal tax advice on your situation.

3. Tax Implications

Assuming you’ve been properly advised that you’re caught by IR35 or the CEST tool suggest so and you are happy to accept that, then the general tax implication is that you are responsible for paying income tax and National Insurance contributions on an amount called deemed payment.

You will need to calculate this deemed payment on your limited company income for the year.

This means that you deduct your Pay As You Earn (PAYE) salary, a 5% expenses allowance, plus any pension contributions.

What’s left is then treated as if it were the gross cost to the employer (deemed payment). So, let’s say if you have £100,000 income, you pay £10,000 as salaries and pay £10,000 into pensions. And let’s say you’re eligible for the 5% expenses deduction. So, the deemed payment which you will need to apply income tax and NI on will be £75,000.

In practice, if you are certain your contract is caught by IR35, then the simplest solution is to pay out all of your limited company’s income less legitimate expenses and pension contributions as a PAYE salary.

4. Public Sector IR35 and tax implications

Originally, the responsibility for determining IR35 status was placed on the contractor and not the end client. But in 2017, the rules changed for those working with public sector clients (HMRC, NHS, the MOD and the like). Here the responsibility to prove self-employment status shifted from the contractors to the public sector client. Under this rule, where a contractor is caught by IR35, they will be taxed and pay NI as an employee. There is no 5% deduction for expenses under the general IR35 deemed payment tax calculation.

5. Private Sector IR35

Fast forward to April 2020 and we now have another IR35 rule called off-payroll working tax rules. These rules are aimed at big private organisations (see exemptions and further aspects below) and the idea is again to shift the burden of determining the employment status of contractors or workers from the contractor to the private organisation. So, in effect similar to the public sector rule but with some differences including the need for the private sector client to carry out an assessment of the employment status of the worker.

6. Private Sector IR35 tax implications

Under the new rules, the fees paid to the contractor, called the “direct deemed payment” are to be treated as employment income. This means PAYE and employees National Insurance is deducted from that direct deemed payment. Then the entity paying the contractor, which could be the agency or hirer, has to pay their employment taxes on top.

7. HMRC will enquire only if it “suspects” fraud

With the private sector IR35, HMRC has recently announced that it will only use the information it gathers from the new rules to open an enquiry into earlier years if there is reason to suspect fraud or criminal activity. Whilst this will be welcome news for many contractors who are worried that a change in their status stipulated by their private sector client will lead to costly investigation, it is worth bearing in mind that the offence of fraud (or cheating the public revenue) is wide ranging and can catch behaviours including: Withholding PAYE/NI; and failing to disclose income.

In the context of IR35, it is not yet clear how HMRC will view a situation where PAYE/NI were not accounted for and where deemed payment income was not disclosed. With the complex rules around IR35, it is envisaged that a pragmatic approach will be adopted by HMRC.

8. Exemptions

It is important to first note that the new rules do not apply to all private sector end clients. Those clients qualifying as “small” will fall outside the scope of the new rules. The companies act definition of small company will be used for this purpose. Therefore where the private sector client does not have a turnover of more than £10.2m, balance sheet value of more than £5.1m and employees of more than 50 (remember any two of the three tests will suffice) then it does not have to assess the employment status of its workers.

So, for contractors who are worried about the new IR35 rules, finding out a bit more about your end client might prove a worthwhile exercise.

9. Provision of Assessment Statement and reasons

Under the new rules, the assessment carried out by the private sector end client will be referred to as a “Status Determination Statement” (SDS). The end client will not only be required to provide their assessment to the worker or contractor but also provide the reasons and rationale behind the assessment.

10. Penalties and Mitigation

With the new rules, it is inevitable that disagreements between HMRC and tax-payers would ensue. In the IR35 case of Paya Ltd, HMRC attempted unsuccessfully to argue that there had been “carelessness” in the company’s behaviour, so it (HMRC) could use the longer six-year, rather than four-year limitation period. And, perhaps so that HMRC could charge carelessness penalties.

Where a contractor has sought advice on their IR35 status, any assertion of carelessness should be strongly defended. Where HMRC is minded to levy a penalty and the issue of carelessness cannot be defended, then the suspension of penalties should be considered as a way to reduce your taxes.

11. Options under the private sector IR35

As stated above, some companies are exempt from the new rules so there is always the option of working with these companies and not with the big banks and PLCs. A second option would be simply to accept employment contract(s) with your end client(s). Alternatively, you could choose to work under an umbrella company where they deduct your taxes and pay over to HMRC.

For many contractors, the new rules may sadly spell the end of their limited company. They’ll need to take specialist tax advice to make the most tax efficient decision when making the arrangements.