Increasing numbers have been working from home in recent years and this has accelerated because of the Coronavirus.
The following is a summary of the tax implications of home working, split between employees and the self-employed, as the rules applying to each are very different.
Employer payment towards additional household costs.
There is no income tax or national insurance contribution liability where an employer makes a payment to an employee for reasonable additional household expenses incurred in carrying out employment duties where a homeworking arrangement exists.
Where the arrangement exists the employer can make a tax-free (no income tax and no NICs) payment to an individual of up to £6 per week (£4 per week up to 5 April 2020) while the employee is working from home. Within this limit no records are required to evidence the incurrence of additional household expenses.
A homeworking arrangement exists where there are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home.
There is nothing that requires the arrangement to be in place for a deferred period of time and HMRC have confirmed that in the current circumstances, with employers requiring their employers to work from home for a limited or even indefinite period of time as a result of the temporary closure of a business premises, they accept that for the duration of that period a homeworking arrangement exists.
Household expenses are those expenses connected with the day-to-day running of the employee's home so relief can be claimed for the additional cost of gas, electricity and metered water. It also covers increased charges for internet access and business telephone calls.
Greater amounts can be claimed than £6 per week where the employee provides the employer with evidence to justify them. This will be relevant where there are significant additional broadband costs and business telephone calls. That evidence needs to be retained unless an arrangement is agreed in advance with HMRC. Such evidence will include invoices for the expenditure, proportion of the home used to carry out employment duties and time so used. A comparison with older bills may highlight increased charges for the COVID-19 period.
For some, working from home will become the 'new normal' and we recommend arrangements are formalised to qualify to be homeworking arrangements once business premises re-open. We are happy to advise further on how matters should be documented.
Employees' unreimbursed household costs.
Employees can make a claim to HMRC for income tax relief on unreimbursed expenses but that relief is more restrictive compared to the above. The deduction is only allowed if:
- the employee is obliged to incur and pay it as holder of the employment; and
- the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
In HMRC's view these conditions are met only where:
- The duties carried out at home are substantive, meaning the employee has to carry them out and represent all or part of the central employment duties.
- Those duties cannot be performed without the use of appropriate facilities which are not available on the employer's premises (or the nature of the job requires the employee to live so far from the employer's premises that it is unreasonable to expect him or her to travel to those premises on a daily basis).
- At no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer's premises or elsewhere.
Whilst an employer's premises are closed due to COVID-19 HMRC may agree that the third bullet point is met.
Again, any claim is for the additional household expenses incurred as a consequence of working at home.
For those employees that submit personal tax returns the supplementary employment pages should be used to claim the expenses. Otherwise a claim can be made online, by post or by telephone and details are at: expenses claim . For an online claim, a Government Gateway user ID and Password needs to be set-up if not already created.
Equipment, supplies and services
It is expected that employers will provide employees with the equipment supplies and services needed to carry out their job, for example, IT equipment like computers and printers, office supplies such as stationery and stamps and services like communication equipment.
There will be no benefit in kind for such equipment where private use is insignificant. HMRC guidance says: “Where a computer is provided by an employer because it is necessary for an employee to be able to carry out the duties of the employment either at home, or whilst travelling or at work, it is highly unlikely that any private use made of that equipment will be significant when compared with the business need for providing the computer in the first place.” So use of the computer for a non-business purpose 'after hours' will not be regarded as significant private use.
Notwithstanding that, in our view best practice for employers is to have a written policy as to when limited private use may be made of employer provided equipment.
Where a single mobile phone and SIM card is provided, this is exempt from tax even where there is no restriction on private use.
HMRC have advised that company cars remain available for private use during COVID-19.
Generally where an employee provides their own equipment in order to work at home no tax relief is available for the cost of that equipment.
However, the Government is providing an exemption for office equipment purchased by employees during the period 16 March 2020 to 5 April 2021 with the conditions being:
- the office equipment must have been purchased for the sole purpose of enabling the employee to work from home as a result of coronavirus; and
- the provision of such equipment would have been tax exempt if it had been provided directly to the employee (so is subject to the proviso that private use is not significant).
A mixture of the low amounts involved and the fact that HMRC's default position is that VAT incurred in respect of domestic accommodation is not VAT input tax will preclude a claim for VAT relief. Where a claim is to be made, for example for the purchase of a computer, a VAT invoice will be required and apportionment of the VAT input tax is required for the best estimate of the split between business and private use. Ideally, an invoice should be obtained addressed to the employer, although for retailer's VAT invoices for less than £250, including the customer name is not a requirement. As the time limit for making a claim is 4 years, perhaps for the time being, wait to see if HMRC offer further guidance for such claims during the pandemic.
Where an employee performs substantive duties of their employment at home as an objective requirement of the job, their home is likely to be a workplace. Where this is the case the employee will usually be entitled to tax relief for the expenses of travelling from home to other workplaces but not to the permanent workplace/main office. However, where no facilities for work are available at the main office so that the employee is objectively required to work at home it may be that occasional travel to the office is deductible. However, HMRC have not opined and a conservative stance is to assume that any travel to the office is not deductible. Their updated guidance to cover COVID-19 advises that payment or reimbursement of transport from work to home is considered a taxable benefit but the context is where the permanent workplace remains open.
Capital gains tax
In the following section on the self-employed, reference is made to the restriction of the main residence exemption to the extent one or more rooms are used exclusively for business purposes. HMRC guidance is that this does not normally apply to employees but that there may be a restriction if a substantial part of the residence is used exclusively for the purposes of the employment.
Self-employed people who work at home are entitled to claim part of the costs of running their home against their taxable income, to the extent that such costs can be demonstrated as being incurred for the purpose of their business. Such claims may, however, have CGT and business rates implications.
Expenses are deductible for tax purposes if they are incurred 'wholly and exclusively for the purposes of the trade'. Relief is also allowed where any 'identifiable part or identifiable proportion of the expense' is incurred wholly and exclusively for the purposes of the trade.
'Wholly and exclusively' does not mean that part of the home must be set aside and used for business purposes to the exclusion of all other activities. As long as part of the home is used for a period of time exclusively for business purposes, the costs incurred on that part of the home during that period of time are deductible. With COVID-19 there will be a greater period of such time.
There is also no requirement that the costs be separately billed. Instead, costs are apportioned between the period of solely business use and the balance of the time covered by the invoice.
Apportioning the expenses
The factors to be taken into account when apportioning an expense include:
- area - what proportion of the area of the homeis used for business purposes?
- usage - how much of a metered or measurable supply (such as electricity, gas or water) has been consumed by the business?
- time - of the total expense, how much time has been used for business purposes? This is likely to increase due to the impact of COVID-19.
Apportioning fixed costs
Fixed costs are those which would be the same, even if no business was being carried on at home. They often include mortgage interest, water rates, general repairs, insurance and rent.
These costs can also be apportioned for tax purposes. But note that:
- only the interest on a mortgage is apportionable; capital repayments cannot be claimed
- if a separate part of the insurance policy covers the business, only this can be claimed; it is not possible to apportion the homeinsurance policy as well
- rent is only allowable where it is paid to a third party: no deduction is allowed for 'notional rent' charged to the business by the proprietor
- repairs of the whole house, such as repainting the exterior, are apportionable based on the proportion of business use of the property
- repairing rooms used for the business is allowable based on the percentage of business use of the room; repairs to a part of the house which is not used for the business, such as repainting a child's bedroom, are not deductible
- council tax can be apportioned, usually based on area. For business rates, see below
Apportioning Internet and phone costs
HMRC accept that 'bundled' supplies of Internet, broadband and / or telephone costs can be apportioned in a similar way to other costs.
Some costs can be allocated more exactly to the business. These include:
- itemised phone bills
- internet connection used only for business
- business website costs
- additional insurance premium for high value business items such as a computer
HMRC provide the following example in their guidance.
Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours.
The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.
After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480).
The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.
The guidance was written before COVID-19 and this and their other examples (see: HMRC examples) can be adapted for that by increasing the business use shown to reflect the additional hours working from home.
Cash basis and simplified arrangement for claiming expenses
If the cash basis is being claimed flat rate expenses can be claimed for working from home. This means it will not be necessary to work out the proportion of personal and business use. Instead a monthly deduction will be allowable provided certain criteria are satisfied. The current rates are:
Number of hours worked per month Applicable amount
25 or more £10
51 or more £18
101 or more £26
A mixture of the low amounts involved and the fact that HMRC's default position is that VAT incurred in respect of domestic accommodation is not VAT input tax will preclude a claim for VAT relief in respect of household expenses. Where a claim is to be made, for example for the purchase of a computer, a VAT invoice will be required and apportionment of the VAT input tax is required for the best estimate of the split between business and private use.
Although HMRC's preference is for all expenses of the partnership business to be included in the partnership accounts, it is accepted that this may not always be practical and deductions may still be allowed through the partnership return provided the costs meet the usual deductibility criteria. However, partners cannot claim expenses against their share of profits in their individual tax returns.
Capital gains tax
If part of the home is used exclusively for business, any gain arising on the disposal of the property is potentially within the scope of CGT. So if a room is set aside exclusively as an office, and never used for any other purposes, part of any gain on disposal is taxable. In other words, the main residence exemption (often referred to as the principal private residence exemption or PPR) does not apply to that part.
If the room is used, even occasionally, for other purposes, there is no CGT. Instead the room is covered by the PPR exemption.
HMRC's guidance states that this exemption is not available where there is 'occasional and very minor residential use'. This does not appear to be justified by the legislation, which clearly states that there must be 'exclusive' use for the business share of the house to be subject to CGT. But to avoid the argument with HMRC our advice is to ensure and keep evidence that there is more than occasional and minor residential use of the room in question.
There will normally be no liability to business rates if the room(s) used for the business are also used domestically.
If a room is used exclusively, or almost exclusively, for business, then business rates may be payable. The council tax banding on the remainder of the property may also need adjustment.
Contact us now
The purpose of this bulletin is to bring to your attention the rules on claiming tax relief for expenses where there is home working. The current pandemic has created exceptional circumstances, where working from home has and will become more prevalent. As such, this is a developing area as far as tax relief on consequential costs are concerned. Specific queries should be directed to your usual CW contact.
This memorandum is for guidance only and professional advice should be obtained before acting on any information contained herein as no responsibility can be accepted by Citroen Wells for loss occasioned to any person as a result of action taken or refrained from in consequence of its contents.
1 June 2020