Working from home – what expenses can you claim?
The Covid-19 pandemic has resulted in more employees than ever working from home, whether because of office closures or the need to self-isolate at home. Many employers and employees will not have considered the tax implications of expense payment associated with home working. To avoid falling into a tax trap, both parties need to understand what expenses are tax deductible and when payments are taxable.
The general rule is that expense payments or benefits in kind provided by an employer are taxable income of the employee. However, some payments and benefits are exempt from tax where employees incur expenses ‘wholly and exclusively in the performance of their duties’. Some of the most common problem areas are explored below.
Additional household costs
Employees working from home will normally incur additional costs, such as heating and lighting. Employers can pay up to £6 a week tax-free (£4 a week before 5 April 2020) to cover reasonable additional costs, provided the employee is working from home as part of a ‘homeworking arrangement’ with the employer, and not informally, such as working from home in the evening or at weekends. HMRC has confirmed that those who are working at home owing to Covid-19, either because the normal workplace has closed or the individual is self-isolating, will be treated as having a homeworking arrangement agreed with their employer for the period they are required to work from home. In other cases, it is advisable to put in place a formal homeworking agreement.
If the employer pays the £6 per week guideline rate, there is no requirement for the employee to keep records demonstrating the additional expenditure incurred.
Where the additional expenses being incurred as a result of homeworking are in excess of £6 week, the employee can be reimbursed those additional costs by the employer without a tax charge arising, provided evidence is supplied supporting the claim.
Broadband and telephone line rental
An employee who starts homeworking and who already has a broadband internet contract in place will not normally incur any additional costs, and no expense claim can be made. This will also be the case for the costs associated with telephone line rental (the cost of business calls may be reimbursed tax-free). If the employer reimburses any part of the employee’s broadband or telephone line rental costs in these circumstances, the payment will be taxable.
Mortgage interest, council tax etc
As with broadband costs, the employee is unlikely to incur any additional mortgage or similar costs as a result of working from home and will therefore be unable to claim these any part of these expenses from the employer. A payment from the employer to cover such costs will be taxable.
There is an exception to this rule if the employee becomes liable to pay business rates owing to the homeworking arrangement. In that case, the additional cost may be included in the expenses claimed from the employer. Similarly, if adjustments are needed to the employee’s household insurance policy to enable homeworking, the additional cost may be claimed.
An employee using their own equipment, such as a laptop, to work from home will not be able to claim any expense from the employer for using the laptop to carry out their employment duties. However, the employee may claim capital allowances for depreciation related to business use. Capital allowance cannot be claimed, however, if the employer offers to provide computer equipment to enable the employee to work from home, but the employee chooses to use their own laptop or desktop computer.
Where an employer provides equipment for the employee to use whilst working from home, no benefit in kind arises. Any private use of the equipment will be ignored provided it is ‘insignificant’, otherwise a benefit in kind arises.
The cost of stationery and consumables, such as printer cartridges, to enable the employee to carry out their duties at home may be claimed as an expense and reimbursed by the employer. No tax charge arises provided there is no significant private use of these items.
If no reimbursement is made by the employer for tax-deductible expenses incurred by the employee, or the amount reimbursed is less than the total expense incurred, a claim may be made in the individual’s tax return for the difference between the amount reimbursed by the employer and the actual expenses incurred by the employee.
PAYE Settlement Agreements
Where expense payments to employees are taxable, for example, round sum payments in excess of £6 per week where the employee’s tax deductible expenses are less than the amount paid by the employer, the taxable amount or benefit should be dealt with via payroll or on form P11d, as appropriate. As an alternative, the employer may wish to consider entering into a PAYE Settlement Agreement to settle the income tax and NIC due. This would enable the employer to make a single payment to cover the tax and NIC due on these benefits.
If you have any questions, please get in touch with your usual Newby Castleman LLP contact.