Home Sweet Home – tax relief and home working

UPDATE 10 May 2022: This article has been revised following the end of special concessions which came to an end on 5 April 2022. 

Following the outbreak of COVID-19 in early 2020, homeworking became the norm for many millions of people and as a result the Government made temporary changes to homeworking reliefs for 2020/21 and 2021/22. These concessions came to an end on 5 April 2022 and for 2022/23 we return to the pre-pandemic rules. This article covers both current and past positions in respect of homeworking. 

The challenge now for many employers and employees is how these rules should be applied in the light of changed working patterns and particularly hybrid working.

Topics covered in this note: 

2022/23 onwards

Employer reimbursements of homeworking costs

Since 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.

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 or hybrid 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.

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 as tax-free benefits in kind – see below for further commentary.

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Tax relief for homeworking employees

If an employer does not wish to reimburse some or all of a homeworking employee’s extra expenses, then the employee is not automatically allowed tax relief on their extra costs. Tax relief for extra costs under s336 ITEPA 2003 is only available if such costs are incurred wholly, exclusively and necessarily for the employee’s work.

HMRC will accept that the conditions for wholly, excusive and necessarily are met if:

  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.  
  3. Such facilities are not available to the employee on the employer’s premises. (Or the nature of the job means that the employee lives so far away from the premises it is unreasonable to expect them to travel there on a daily basis.)
  4. 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.

HMRC provide a number of examples of how these conditions are applied in EIM32790. HMRC emphasise in their online claim service that where an employee is able to choose to work from home, relief for additional costs is not available, so the element of choice, if there is one, is very important.

What costs can the payments cover?

An employee who meets these conditions can claim relief for the following expenses. With the exception of insurance, there 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, as confirmed in 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
  • By phone
  • By post
  • Or, if they are registered for self-assessment, through their tax return.

Full details on the different claim routes are available from GOV.UK and HMRC has an interactive questionnaire to help guide employees to the most appropriate method for their circumstances.

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Provision of Home 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. Employers and employees need to be aware though, that the tax position is significantly affected depending on how it is paid for. While a welcome concession was applied for 2020/21 and 2021/22 to allow employees to purchase and employers to reimburse costs, this has now ended.

Employer purchase

Where 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.

When or if the employee returns to the workplace and ceases to use the asset at home, some consideration will need to be given to what happens to the employer's property. If the property is returned to the employer, there will be no tax consequences. But if the employee keeps the asset and ownership of the asset is transferred from the employer to the employee then a benefit in kind could arise based on the market value of the asset at the time. If the employer does not wish the employee to suffer a tax charge, one option might be to include the asset transferred on a PAYE Settlement Agreement which would mean the employer would cover the tax costs of transfer. 

Employee purchase and employer reimburses

Where an employee purchases their own equipment personally and the employer reimburses them, this can cause tax issues as the reimbursement will be viewed as taxable income, subject to income tax and national insurance. Unless the concession for 2020/21 and 2021/22 (see below) applies, this should generally be avoided.

Employee purchases but employer does not reimburse

Where an employer is unwilling to reimburse the cost of equipment or office furniture, then employees can only claim tax relief their costs if they are able to satisfy the conditions to claim capital allowances. This requires the employee to demonstrate that the equipment is used in the performance of their duties.

While this may be straightforward for laptops and computers, under current HMRC guidance, employees 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. HMRC does not consider these items are used in the actual duties themselves in the way that a laptop or printer would be.

Accordingly, tax relief from HMRC is unlikely for the costs of office furniture and in the first instance employees should see if this is something their employer is willing to purchase.

Claims for office furniture cannot be made through HMRC’s online microservice.

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Homeworking in 2020/21 and 2021/22

During 2020/21 and 2021/22, temporary easements made it much easier for employees working at home for some or all of both years to receive tax relief. For reference purposes we have kept the details below of how these relaxations evolved over time.

Temporary relaxation for 2020/21 

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 did not meet the strict definition of home as workplace and whose employers would 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 would be available for individuals who were working at home on a regular basis for all or part of their time as a result of coronavirus. This relaxation to the usual tests was stated to apply for 2020/21 as long as the employee was not working at home by choice.

HMRC emphasised to us at the time that it was not possible for employees to simply decide to work from home in light of the Government's advice. It was necessary for there to be some form of discussion with the employer and, if the employer decided that the employee should work from home for a period, the deduction would be available.

This requirement that the employee must not have chosen to work at home caused some confusion at the time. Our understanding was that although HMRC's position generally remained that when working from home is purely a choice an individual cannot claim, they would be more lenient regarding claims for 2020/21 to prevent multiple claims/contact from employees during the year as their position regarding homeworking changed as the country went in and out of lockdowns and restrictions.

In practice, most people who were able to work from home were highly likely to be mandated to work from home as a result of Government guidance at some point during 2020/21. Therefore, HMRC's position was that as long as an individual has been required to work from home at some point in 2020/21, they would accept a claim for homeworking relief for the whole tax year (provided it was made within the usual deadlines).

This meant that if an individual started working from home because their employer required them to, but then returned to their workplace for a period, this would not restrict the relief they could claim during 2020/21. HMRC confirmed to us that they would apply tax relief for the whole of this tax year, even if the taxpayer went back to their workplace before 6 April 2021. HMRC also confirmed that relief would not be restricted where the individual was only working at home on a part time basis.

In a meeting with professional bodies during 2020, HMRC indicated that the following examples would all be eligible to claim relief in 2020/21 provided working from home had been mandated at some point in the tax year:

  •  An employee is asked to work at home, but required to attend the office on certain occasions where this is business critical.
  •  An employee is asked/required to work at home as the default position, but could attend the office at their discretion if it was easier to complete a particular piece of work, or for personal wellbeing reasons.
  •  An employer strongly encouraged, but strictly did not require, homeworking and employees were free to attend their usual workplace at any time subject only, say, to pre-booking one of a limited number of workspaces available on a 'first come, first served' basis in order to ensure social distancing
  • An employee could only choose to come into the office for, say, three out of five working days per week, or if limited availability of working spaces means they would not necessarily be able to work in the office at a time of their choosing.

If there was never any mandated working from home, then an employee would not be eligible.

HMRC launched an online claims microservice on 1 October 2020 which was set up to give the full amount of homeworking allowance for the 2020/21 year automatically. This was intentional to prevent multiple claims and amendments - HMRC were not asking anyone to say when they would return to the office or choose to work from home (as opposed to being required to).

A few individuals who claimed prior to the launch of the microservice and didn't claim relief for the full year - or who claimed over the £6 limit and/or included an additional expense – may not have received a full year’s worth of relief in 2020/21 as a result of lack of clarity over the position until that point. These people should contact HMRC if they want to increase their claim.

Temporary relaxation for 2021/22

Our original understanding was that the temporary relaxation which applied to 2020/21 would not apply to 2021/22. However, on 6 April 2021, it was reported by Martin Lewis of Money Saving Expert that the homeworking allowance would be available on the same terms for 2021/22 as it was for 2020/21- i.e. that as long as the individual had been required to work at home for some period during 2021/22 they would be able to claim through HMRC's microsite for the whole 2021/22 year.

We sought specific confirmation from HMRC regarding the position for 2021/22 and asked them to confirm that any homeworking for any period in that year which is not undertaken by choice would enable the individual to make a claim for the whole period and received the following additional information from HMRC's Press Office. 

"We recognise that ongoing lockdown restrictions mean that many employees are still required to work from home for some or all of the time. Therefore, we're accepting claims for the full year's expenses for the 20/21 and 21/22 tax years for employees who are eligible. This includes customers claiming through self-assessment.  To be eligible for tax relief you must carry out work which form all or part of the central duties of your employment and in doing so, you must have additional costs, such as heating, metered water bills or business calls, that are incurred as a direct result of working from home. They don’t include costs that would stay the same whether you worked at home or in an office.”

On 30 June 2021, HMRC issued a press release confirming that even if the employee was only told by their employer to work from home for a single day, they would be eligible for the full year's entitlement.  

Claims for the homeworking allowance for 2021/22 can also be made through the online micro-service.

For those in PAYE, claims for homeworking allowances were not rolled forward into 2022/23 and any one working at home during 2022/23 and who wants to claim tax relief will need to confirm that they meet all the conditions set out above before submitting a new claim for 2022/23.  

Office Equipment

2020/21 and 2021/22 concessions for employer reimbursement

As a temporary concession, the Government introduced legislation on 11 June 2020 to allow employers to reimburse employee equipment purchases without tax consequences.  Initially applying only until 5 April 2021, this was subsequently extended to 5 April 2022. HMRC were also able to use discretionary powers to treat the exemption as applying from 16 March 2020, when the first work from home directions were issued.

As a result, any reimbursement by an employer for the cost of equipment was exempt from income tax and national insurance between 16 March 2020 and 5 April 2022 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 was not significant.

As this exemption was laid under powers provided for by section 210 of ITEPA 2003 (power to exempt minor benefits) - and equivalent sections for NICs - any exemption was conditional on the benefit being made available to all an employer's employees on generally similar terms. Therefore, employers should have ensured that similar reimbursement terms applied to all employees that needed to work from home. It was not, for example, acceptable for directors to reimburse themselves for office equipment but not other staff.

If the employee returns to the office at some point and retains the equipment they were reimbursed for, no benefit in kind arises at that point as there is no transfer of ownership. The property has been that of the employee throughout.

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