There are a range of tax issues that arise where employees are working from home in the UK as a result of the COVID-19 pandemic. The following is not an exhaustive list, but provides a basic checklist for employers to consider.
‘Home’ as an office
Ordinarily an employee can only treat their home as what is termed “a permanent workplace” where it is an objective requirement for the employee to work from home and where substantive duties are performed from home (“ordinary” expected to be around 80% of their core duties of employment).
If this high bar is met, then subsequently where an employee incurs additional household costs in working from home (e.g. utilities), these can potentially be claimed as a deduction by the employee via Self-Assessment. That said, the costs reimbursed would need to be supported by calculations demonstrating the additional costs incurred. This will require considering the area of workspace in relation to total area space of the home, and applying that percentage to the bills incurred. If the above costs are reimbursed by an employer, then where the costs are considered to meet the above tests and can be demonstrated with robust documentation, costs would again not be taxable.
Home working allowances
Alternatively, where employees work from home as part of a home working policy, an employer can pay an un-receipted allowance of up to £6 per week (£26 per month) from 6 April 2020, where the following two tests are met:
- There must be arrangements between the employer and the employee for the employee to work at home instead of working on the employer’s premises
- The employee must work at home regularly under those arrangements.
The arrangements need not be in writing, but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings, or where an employee works from home on a particular day, simply to take in a delivery.
During lockdown, as employers may require their employees to work from home for a limited or even indefinite period of time as a result of a temporary closure of the business premises, then HMRC accepts that for the duration of that period these two tests would be met.
There is nothing in the underlying legislation that requires homeworking arrangements to be in place for a particular period of time. If not already working under homeworking arrangements, HMRC would agree that employees would be covered by the exemption when either the employer agreed they could work from home or from when Government advice was announced.
The legislation also envisages scenarios where an employer reimburses employees. However, as a concession, HMRC has confirmed that employees may claim tax relief to the same value directly from HMRC whilst the current situation continues (see here). As a broad simplification, once a claim is made from a start date in the 2020/21 or 2021/22 tax year, HMRC will apply the relief for the whole year, even if the employee then returns to the office before the end of that year. However, even if you have claimed for the 2020/21 tax year already, a separate claim is required for 2021/22.
Home-working equipment purchased by an employer
There is a specific tax exemption which applies to ‘employer-provided’ supplies and services in the employee’s home. In order for the exemption to apply, there are two primary conditions which must be met:
- The sole purpose for the provision is to enable the employees to perform the duties of their employment, and
- Any private use by employees is insignificant.
In this context, ‘employer-provided’ means the employer arranges and pays for the item. For completeness, it is worth noting there are some specific exclusions from the exemption, such as provision of transport/vehicles and alterations/building at employees’ homes. In the usual ‘home office’ context, this means monitors, keyboards, desks and chairs, etc.
The equipment remains the property of the employer, and should subsequently be returned - if ownership is transferred to employees, a taxable benefit will arise (although the value of some second hand items may be minimal).
Home-working equipment purchased by employees
Ordinarily, where any items are purchased by employees and the cost is reimbursed by the employer, the reimbursement would not qualify for the above exemption. In May 2020, the Treasury announced the introduction of a temporary tax and NIC exemption to cover any home office equipment purchased by employees and reimbursed by employers as a result of the coronavirus pandemic. This measure applied retrospectively from 16th March 2020, and continued until the end of the 2020/21 tax year.
To be eligible for this temporary exemption, the reimbursed expenditure must meet two conditions:
- The equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak, and
- The provision of the equipment would have been exempt from income tax under the existing exemption had it been provided directly to the employee, as set out above.
Under this temporary exemption, a taxable benefit will not arise if the equipment is retained by the employee rather than being given to their employer.
Mobile Phone Costs
As employees will not have access to their work phone, they may be using their mobile phone more frequently. Depending on what is being claimed and reimbursed, a taxable benefit may arise.
Where the mobile phone has been provided by the business, and the contract is between the employer and supplier, no benefit arises. In this situation there are no reporting obligations (the same will apply to one SIM card provided by the business for use by the employee).
The rules become more complicated for costs claimed where employees are using their personal mobile phone:
- Where an employee is claiming for itemised business calls, texts and data only (and this is evidenced), the cost reimbursed is not taxable.
- Where an employee is claiming for their fixed call plan (say £30 all-inclusive calls, data, etc), the cost will always be taxable.
- Where an employee is claiming for costs over and above the fixed call plan, if they can demonstrate that the additional cost relates to 100% business use, only the fixed call plan will be taxable.
- Where there is no justification for the costs being claimed, and so the business use and personal use cannot be determined, the total claim will be taxable.
If an employee needs a broadband connection installed as a result of needing to work from home, and the business arranges this, then the costs can be tax free. However, it is worth noting that this should be under a business-led requirement that the employee has to work from home because of the pandemic, rather than they are choosing to do so.
For employees that have an existing broadband connection, if it is not possible to split the business use and personal use, any reimbursement will give rise to a benefit in kind, and the whole payment will be taxable. As with mobile phones, if the employee can split their bill and claim only for the business use element e.g. additional data requirements, etc., a reimbursement can be made with no tax implications.
International homeworking can trigger many more tax risks and issues - read our briefing.
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