Stuart Crook FCA explains the rules around expenses related to employees working from home.
The advance of the internet combined with other developments in technology have given rise to more homeworking in recent years. Whilst enabling employees to enjoy a better work life balance, and related potential productivity gains, as an employer there are important tax implications to this that you need to be aware of related to expenses.
In this post we explain how working from home tax relief works and all the rules and nuances in order to help you navigate this potentially confusing area of legislation.
Benefits, expenses, and working from home
When you make payments to an employee that aren't part of their salary, you're potentially providing them with cash benefits, which could be seen as additional pay or a benefit in kind. Depending on the item in question, these can then processed through the regular payroll with the appropriate tax and National Insurance (NI) deducted when it's run.
Alternatively they can be included in the annual P11Ds prepared by employers. Either way there is a cost to the Employer that cannot be ignored. The good news however, is some benefits and expenses are ring fenced meaning they're not taxed. Examples include:
The last point is the area of focus for this post, specifically business expenses related to working at home. This means as an employer you can make tax-free payments to your staff to help them cover certain additional expenses they incur to do their work from their own dwelling.
What constitutes eligible home working?
Interestingly there isn't a definition of a homeworker, instead it is up to your employees to identify their relevant, allowable expenditure. That said for the expenditure to be eligible, the employee must be performing some, or even all, of their duties from their home. They can't be working from home informally such as the odd evening outside of working hours, that won't qualify.
The key point is where there is working at home then there needs to be clear, formal, arrangements, preferably detailed in writing. An employee contract or alternatively the staff handbook are appropriate documents for this, and we explain why this is so important later in this post.
To qualify your employee has to work from home regularly. This means an arrangement that is a frequent occurrence in their working lives. They may work from home for a set amount of time, say every week or month, on a Monday and Tuesday. Alternatively they can vary the days on which they work at home each week. There just needs to be regularity to the arrangements.
What expenses are covered and the tax claim for working from home?
You can only pay employees for the reasonable costs that they incur as a result of working at home. Only where there is an increase in costs incurred by the employee can there be reimbursement by you, the employer. There is a working from home allowance, or flat-rate, that you can pay them either £6 per week, or £26 per month, depending on whether the employee receives their pay on a weekly or monthly basis.
By doing this you don't need to justify the expenditure to HMRC and therefore records don't need to be kept evidencing their additional costs. If the flat-rate doesn't cover their expenses, then a greater amount can be paid tax free but you will need to provide evidence of the additional expenses. Allowable items include:
Heating and lighting
Things such as rent, council tax, and mortgage costs aren't included because they remain the same and would be incurred regardless of whether your employee works at home, or not.
Telephone and broadband can only be claimed where the employee was not connected to these services prior to working from home. That's because in such instances the expenditure is an additional cost because they had to make payment for the service in order to perform their work duties from their place of residence.
What about office equipment and furniture?
Office equipment and furniture do also qualify for exemption from tax and NIC as long as:
The equipment is used to enable the performance of your employees work tasks
There is limited private use by your employees of said equipment
In cases where there is significant private use, this will result in a benefit in kind arising. Again an employer you will want to therefore ensure your employment policies state specifically that private use of the equipment is either minimal, or not permitted.
What if the employee purchases equipment and makes an expense claim?
Prior to COVID-19 pandemic employees purchasing equipment and then claiming it back from their employer through their expenses could potentially lead to the employer being taxed. Thankfully, the lockdown saw the government announce a temporary exemption from income tax and NI for these reimbursements.
Arrangements during the COVID-19 lockdown
For many businesses the enforced lockdown as a result of the COVID-19 pandemic, means HMRC now accept employees are working from home due to offices being closed. This means your employees are eligible to receive the tax free allowance of £6 per week. This would start from the date that you, their employer, agreed they could work from home.
One of the things HMRC will check in this area is whether there are expenses related to working from home and whether the employee the expenses are related to can be classified as a homeworker. To ascertain the answer to this, they'll often ask for copies of the employee handbook and/or employment contract for evidence of this fact. If you don't have this in place you could be looking at a tax charge.
Given the support and initiatives the government have provided to the private sector during the COVID-19 pandemic, expect the taxman to conduct more investigations and PAYE audits in the future.
This post was created on 09/07/2020.
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