Can my employees claim expenses for working from home?
Under the strict letter of the law, if an employer pays expenses to an employee to cover additional costs of working from home – for example lighting, heating and water - those expenses should to be reported to HMRC annually and income tax charged on them.
The employee will then be able to make a claim that the expenses were wholly business related and HMRC should give tax relief for the same amount.
This means that the overall position would be neutral, but the process is not straight forward.
To simplify this, HMRC will agree that no tax liability arises where an employer makes payments to an employer for reasonable additional household expenses, which the employee incurs in carrying out duties of their employment at home under "homeworking arrangements".
What are "homeworking arrangements"?
These are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home.
The HMRC guidance advises that:
“The arrangements need not be in writing but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings. It applies where an employee works at home by arrangement with the employer instead of working on the employer's premises.”
This means that if you have an agreement with you employees to work from home and it follows, then they can claim:
- £6/ week for weekly paid employees or;
- £26/ month for monthly paid employees
If you wish to pay more than the guideline rate of £6per week tax-free, then it is recommended that you should agree a scale rate in advance with HMRC. Failing that, records will need to be kept of the actual additional costs incurred by each employee.
Which expenses are covered?
- Additional costs of heating and lighting the work area or the metered cost of increased water use
- Increased charges for Internet access, home contents insurance or business telephone calls.
- Where working at home leads to a liability for business rates the additional cost incurred can also be included
The additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent, council tax or water rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations or the cost of furniture or office equipment.
How about home office equipment?
If required to work at home, to be eligible for the exemption the expenditure must meet two conditions:
1.Theequipment is obtained for the sole purpose of her to work from home as a result of the COVID-19 outbreak;
2.The provision of the equipment would have been exempt from income tax if it had been provided directly to the employee by or on behalf of the employer.
Let’s look at an example
Mary works full-time in the accounts department at her employer’s office in London.
Due to the coronavirus pandemic, the office was closed and she has been asked to work from home.
She needed to convert a spare room in her home into a dedicated office – her employer said they will reimburse Mary for any business-related costs.
She needed a desk, chair and a shelving unit. She also wanted to replace the curtains and buy a cheerful rug for the room. She has a work’s laptop which she can use, but needed a printer.
As Mary was required to work from home during the pandemic, expenses reimbursed for home office equipment purchased will be covered by the temporary tax and NIC exemption. The purchase of replacement curtains and the rug are therefore unlikely to qualify for the exemption and should be recorded as taxable expenses accordingly.
Mary’s employer could pay a flat rate expense allowance of £6 per week to cover the additional costs of working from home. This amount can be paid tax and NIC-free and does not need to be reported to HMRC.
As usual, we are here to answer any other questions you might have.