Due to uncertain situation from the coronavirus (COVID 19), most of the directors and employees are working from home for some or all of the time.
In order to perform their duties and depending on the nature of the job, the employee may need certain equipment for work, such as a computer. The employer will generally provide this if employees do not have this or own it. Employer may also provide the employee with necessary supplies, such as paper, printer ink etc. When the employer provides equipment or meets expenses, it’s vital to consider the tax implication and relief related to it.
- Work from home expenses
- Available Tax reliefs
- Reimbursement of additional household expenses
- Two ways of claiming expenses
Homeworking expenses include
- Equipment, services or supplies you provide to employees who work from home (for example computers, office furniture, internet access, pens and paper).
- Additional household expenses, such as gas or electricity charges, for employees who need to work from home.
Tax reliefs available
There is no tax charge on the expense that an employer incurs in providing directors and employees with supplies and services that:
- Are provided other than on the employer’s premises (e.g. employees who work at home or whilst travelling), and
- Are provided for the sole purpose of enabling the employee to perform the duties of the employment and
- Individual uses in performing the duties of the employment, and any use for the employee’s private purposes are not significant.
If above conditions are met and you have provided equipment, services and supplies to an employee who works from home, you do not have to report or pay any BIK or tax if they’re only used for business purposes, or any private use is insignificant.
For Additional household expenses, there are two options available.
Option 1: Employer reimbursement of costs
Employers can help employees to cover their reasonable additional expenses incurred while working from home. Eligible certain payments are not subject either to income tax or national insurance as well as deductible for the purpose of corporation tax. For the employer to be eligible for homeworking arrangement : -
- There must be arrangements between the employer and the employee.
- The employee must work at home regularly under those arrangements.
Casual/informal working at home which is not by arrangement - does not count as homeworking – for example taking work home at evenings will not qualify for tax-free reimbursement of costs and it is good practice for this to be in writing.
There are majorly two ways to claim these expenses: -
- Flat rate basis
- Factual/Actual cost basis
Flat rate basis
From 6th April 2020, HMRC allows you to reclaim a flat rate of up to £6 a week or £26 a month (£4/week or 18/month before 6th April 2020), to cover your additional costs if you work from home. There is no need to keep any records.
Factual/Actual cost basis
If you think that you may able to prove by way of a ‘fair and reasonable’ calculation that you are incurring additional costs because of working from home and the actual costs are above of flat rate basis i.e. £6 per week, then you may claim the higher sum if HMRC agrees. You will need supporting evidence to demonstrate it in case of revenue audit or objection.
If you cover any costs over the weekly limit (£6, or £26 a month for employees paid monthly), you need to be able to prove that the payments are no more than your employee’s additional household expenses.
If the payments you make are more than your employee’s additional household expenses they count as earnings, so you’ll need to:
- work out the excess and add this to your employee’s other earnings.
- Deduct and pay PAYE tax and Class 1 National Insurance through payroll.
There is a certain difference in rules for directors and employees who work from home. They are not allowed to claim rent or mortgage interest while the sole trader can. However, a director may able to rent out part of his property to the company and charge a market rent for the use of the property, which can help in claiming more than £312/year. The director should document the transaction and maintain proper records, otherwise HMRC can challenge it and the rent paid may be classified as additional salary which would be subject to Tax and Class 1 NICs.
For the company, the rental payments are deductible from its profit and will reduce Corporation Tax liability and the director will need to disclose the rental income in their tax returns and can deduct allowable expenses like electric, lighting, heating, broadband etc. after appropriate apportioning. If the rent is £1,000 or less, then it will be covered under the property allowance.
Option 2: Employer reimbursement of costs
If an employer does not reimburse some or all of the homeworking employee’s additional expenses, then the employee is not automatically allowed tax relief on their extra costs. Tax relief for extra costs is only given if such costs are incurred wholly, exclusively and necessarily for the employee’s work and it was incurred for performing their duties.
In order to claim relief, the employee must establish that their home is a workplace. HMRC will accept that a home is a workplace where below conditions are satisfied:
- The duties that the employee performs at home are substantive duties of the employment. “Substantive duties” are duties that an employee has to carry out and that represent all or part of the main duties of the employment.
- Duties which cannot be performed without the use of appropriate facilities.
- No such appropriate facilities are available to the employee 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.
If one or more of those conditions are not met, it is likely that the employee will not satisfy the statutory tests.
Note: No relief is available for expenses incurred for both business and private purposes.