Many of you will be aware of the ‘big’ Government initiatives to help employers and the self-employed – who had ever heard of the word ‘furlough’ before March?
But there are also other measures, which aren’t as prominent in the headlines, to help the many millions of individuals who are employees, required to work from home, either because their office has been closed, or because they are following advice to self-isolate.
For most, if not all, of these newly home-based workers, there will be additional costs incurred as a result of working from home. These extra costs may or may not be reimbursed by their employers and, if these costs are not reimbursed, the employee may be able to claim tax relief directly from HM Revenue & Customs (HMRC). Unfortunately, employees who work from home by choice cannot claim tax relief from HMRC.
Tax treatment of Expenses Reimbursed by Employer:
From 2003, employers have been able to make income tax and national insurance (NI) free payments to employees covering reasonable additional expenses incurred for working from home, but only in certain conditions.
In May 2020, HMRC temporarily (for the 2020/21 tax year) updated their guidance to confirm that, generally, the conditions are satisfied during the Covid-19 Pandemic if the employee is required to work from home. These rules do not apply to furloughed workers who are eligible to the Coronavirus Job Retention Scheme.
So what expenses are employers able to reimburse tax-free?
- A flat rate home working allowance of £6 per week/£26 per month (prior to 6 April 2020, it was an even less generous £4 per week/£18 per month). Alternatively, employees can make claims for higher amounts, based on the actual additional costs incurred, but evidence is required to support the costs.
- Employer provided loans – a salary advance or loan from an employer to provide help at a time of hardship counts as an employment-related loan. Interest free employer loans of less than £10,000 in a tax year are non-taxable as a benefit in kind.
- One mobile phone can be provided to an employee tax-free, and there is no restriction on private use. Ownership of the phone must not transfer to the employee though.
- If an employee already has a broadband connection (who hasn’t these days?), this is an existing expense and cannot be reimbursed tax-free as there is no additional cost incurred as a consequence working from home. However, if an internet connection is needed to work from home and one was not already available, then the broadband fee can be reimbursed tax-free, provided any private use is limited. A similar principle applies to the provision of telephone landlines.
- An employer can purchase laptops, tablets, computers, and other office furniture and equipment to enable home-working. The provision of this equipment will be tax-free, provided it is used mainly for business and there is no significant private use. Likewise, where an employee purchases the equipment, the employer can reimburse the actual cost, again, provided there is no significant private use. A new exemption has been introduced to facilitate this, provided the equipment has been acquired for the sole purpose of enabling the employee to work from home as a result of the Covid-19 Pandemic, and the provision of the equipment would have been exempt from income tax and NI if it had been provided directly to the employee by the employer.
Tax Treatment Where Employee’s Expenses Are Not Reimbursed:
Where an employer does not reimburse some, or all, of the additional home-working costs, the employee may have the option of claiming tax relief directly from HMRC. However, these expenses must be incurred wholly, exclusively and necessarily for the employee’s work.
The flat rate tax deduction for the use of a home as an office, as mentioned above, enables employees to claim £6 per week (£26 per month). This allowance does not include the cost of business telephone calls, therefore an additional claim can be made, based on amounts incurred.
Employees may claim tax relief on a higher amount, again based on actual additional expenditure, claims can be made for additional heating and lighting costs, and metered water, but these claims cannot include mortgage interest, rent, council tax, insurance (unless specific additional policy to allow home working) or water rates, as these are all effectively ‘standing charges’. In many cases, the additional claim based on actual additional costs will not likely be worth making, due to the level of ‘evidence’ required to support the claim.
Employees who are new to working from home may require additional computer equipment (e.g. monitors, keyboards, printers, scanners etc) and even furniture such as desks and chairs to make an office space at home. In some cases, the employees may have, in their rush to get a fully functioning home office, purchased these items themselves. As mentioned above, if this expenditure is reimbursed by the employer, the newly updated guidance means that the reimbursed amounts will not generally be taxed. However, if the employer does not choose to, or is unable to reimburse the cost of this equipment, the employee may be able to claim tax relief under the capital allowances legislation.
For a claim to succeed, the employee will need to demonstrate that the equipment is used wholly, exclusively and (crucially) necessarily in the performance of their duties. While this may be straight forward for computer equipment, HMRC are likely to argue that items such as desks and chairs only put employees in a more comfortable position to perform their duties, rather than actually enabling them to carry out their duties!
We are living in a rapidly changing landscape, tax included, and there may be further revisions to HMRC guidance covering the claims outlined above, if the Government’s advice to “work from home if you can” continues.
How to claim for non-reimbursed expenses?
Any claim relating to the Covid-19 Pandemic, and certain of the temporary measures outlined above, will largely relate to the current, 2020/21, tax year, although there may be certain expenses incurred in March to consider, when ‘lockdown’ began.
If the employee usually completes a self-assessment tax return, the claim for home working expenses may be included on their 2020/21 tax return, which will be issued after the end of the tax year (6 April 2021).
Alternatively, if the employee doesn’t want to wait that long, or in the absence of a tax return, an expense claim may be possible via a form P87 (by post or online), or alternatively by telephone (the lines are currently horrendously busy so be prepared to hold!).
Once processed, HMRC should issue a revised PAYE tax coding notice, including the tax deduction for the working from home expenses, and should be applied in the next payslip.
These expenses claims are made retrospectively, therefore it may be worth waiting to make a claim until a return to the office, or until there are at least a few months’ of working from home expenses, to make such a claim worthwhile.
As usual, please contact us if you have any questions about the matters covered in this article, and we will be delighted to help.
Stay safe and well.
This article is for educational purposes and should not be considered as advice. Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change in the future. Tax planning is not regulated by the Financial Conduct Authority.