Home Sweet Home – tax relief and home working

Last updated 24 June 2020

When we originally wrote this article in November 2018, we noted that home working was becoming increasingly common. Figures from the Office of National Statistics showed that between 1998 and 2014 the number of home workers increased from 2.9m to 4.2m. Since the outbreak of COVID-19 however, homeworking effectively become the norm for many millions of people.

Employees working from home may incur additional costs. For some, their employer may be willing to reimburse their costs. If this is not the case, then the employee will need to see if tax relief is available. This article considers both options and the different conditions that apply in each situation as well as highlighting some specific issues regarding the provision of office equipment which should be considered separately.

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 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 government advice was announced.

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.

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 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?

In order to claim tax relief, the 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 points one and two above should be met by employees homeworking as a result of COVID-19, we have yet to receive confirmation from HMRC that point three will be considered to be met. If HMRC do not consider this is met, then this will have implications for those seeking tax relief.

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 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. We are awaiting further clarification from HMRC on this point as this is not consistent with the current, published guidance.

What costs can the payments cover?

An employee who can show that their home is a workplace can claim relief for the following expenses which, 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.

An employee can make a claim online, by phone, by post or, if they are registered for self-assessment, through their tax return. HMRC has a tool, available here, to help guide employees to the most appropriate method for their circumstances. 

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. Some new 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 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 the current circumstances, some 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.

Legislation was laid for 20 May 2020 which took effect on 11 June 2020. This introduces as a temporary measure for 2020/21 - there will also be, by discretion, an exemption for the period 16 March 2020 to 5 April 2020 when much homeworking will have started - provisions for any reimbursement by an employer for the cost of equipment to be 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 - so 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 and employer does not reimburse

If the employer is unable or unwilling to reimburse equipment costs 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 and they are likely to struggle to obtain relief under capital allowances under current HMRC guidance.

Relief on office furniture such as desks and chairs will be particularly challenging as arguably they put the employee in a (more comfortable) position to do their duties, rather than being used in the actual duties themselves. The Low Incomes Tax Reform Group in particular are urging caution here.

Accordingly, employees will be best off seeking reimbursement from their employer for costs of office furniture, as tax relief from HMRC is unlikely. Where they are seeking relief for office equipment used in their duties, then tax relief is more possible.