The tax implications of working from home during the Covid-19 pandemic
As a large proportion of the country’s workforce are currently working from home, employees and indeed employers, are increasingly looking at the rules surrounding allowable expenses around home office use. As always, careful consideration must be given by all parties to avoid any unintended taxation consequences further down the line.
Allowable Expenses for Home Working
HMRC, due to the current situation, increased the amount of tax-free allowance which an employer can provide to their employees for additional home expenses for working from home, from £4 a week, to £6 a week, effective from 6 April 2020.
There is no requirement for records to be maintained or provided by the employee and there are no taxation consequences if the flat rate is paid. Employers can pay more than this to an employee, but evidence will have to be shown that the payments are paid ‘wholly and exclusively’ in the performance of the employees’ employment duties. If any payments are made which are deemed not to meet the ‘wholly and exclusive’ test, then the payment will be treated in the same way as salary and will be subject to PAYE in the normal way.
In practice it may be difficult to calculate the exact additional cost of working from home and for ease it may be easier from an administration point of view for the employer and employee to make use of the flat rate tax-free allowance.
If the employee wishes to work out the additional cost of home working, any payment is designed to cover:
- The additional cost of gas and electricity consumed whilst a room is being used for work
- The additional metered water used – if on a water meter
- The unit costs of business telephone calls
The payment does not cover, as these cannot be ‘wholly and exclusively’ incurred for the purposes of working from home:
- Council tax
- Mortgage payments
- House Insurance
- Water rates
- Internet usage
If the employer does not provide any allowances, the employee can claim tax relief directly from HMRC via either their self assessment tax return or via
a form P87.
Reimbursing expenses for home office equipment
Due to the Covid19 pandemic, the government also announced a temporary tax and National Insurance exemption in respect of office equipment, if an employer
reimburses their employees for any costs incurred. The exemption began on 16 March 2020 and will run to at least 5 April 2021.
The expenditure must meet the following two conditions to be eligible:
- That 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 if the employer provided the equipment to the employee directly.
Again, if the employer does not provide any reimbursement, the employee can claim tax relief directly from HMRC via either their self assessment tax return
or via a form P87.
Home offices – watch out!
It may be tempting for some taxpayers to set aside a particular room in their house and create a standalone office space. Allowing them to claim for more
expenses than listed above. Potentially, a proportion of all household costs, including mortgage payments, could be claimed as they would represent
However, care has to be taken here as by taking income tax relief could cause an even more valuable capital gains tax (CGT) relief to be lost.
Principal private residence relief works so that, for the vast majority of taxpayers, an individual pays no CGT on the sale of their main home. This can
be restricted if a particular room or area of a property is used exclusively for business with no personal use whatsoever.
This particular trap can be averted if it is possible to show that the room has a dual purpose. A solution could be something as simple as putting a sofa,
television or children’s computer in the ‘office room’ and not restricting the use purely for work purposes.
In making any expense claim, this could be factored in to the calculation. Whereby say the room is used for 12 hours in a given day, the claim could represent
8 hours out of the 12 hour period. In addition, if a Director/employee is charging the company rent for use of the ‘office’, the rental agreement could
take this into account and the terms state that the room is only available for business use during specific times in the day.
We can of course help any company or employee navigate this area and assist when appropriate.
If you would like more information in relation to the above please do get in touch with our Tax Partners, Steve Crompton or Lucy Williams, on the details