For many employees the recent COVID-19 pandemic has changed their working arrangements significantly and will continue to effect changes for the coming months and years. Suddenly the ‘office’ has taken on a new meaning and location, namely their own homes. Here we discuss the tax implications to be considered alongside this shift.
Choice or necessity?
The first thing worth noting when considering the tax implications of homeworking is that eligibility for tax exemption or relief is dependent whether or not you had a choice in the matter. If an employee has been forced to work from home as a result of COVID-19 restrictions, or their home has been designated as their workplace, this is quite different from them choosing to work from home.
If it is written into your contract that your place of work is your home, or if your employer does not have enough office space to accommodate all employees, then you would be eligible for tax exemption/relief. If, however the homeworking arrangements are only occasional/informal, you would not be able to claim relief or reimbursement.
Difference between expense reimbursement and tax relief
How does expense reimbursement differ from tax relief? In certain cases, your employer may directly reimburse you for business expenses incurred, but in others, the you would need to make a claim in the form of tax relief. If your employer takes the reimbursement route, they do not need to report the expense payments to HMRC, as long as they are valid business expenses. As an employee however, you would be responsible for retaining evidence of the expenses in the form or invoices/receipts/statements.
Additional homeworking costs that could be reimbursed by your employer include, gas, electricity, phone and broadband charges. The costs should be reasonable and should relate to duties undertaken, but for simplicity, a flat reimbursement rate can be used to avoid time consuming and complicated calculations. The HMRC rate was increased in April from £4 to £6 a week in light of the recent COVID-19 situation.
Home office equipment expenses during COVID-19
With regards to this year’s COVID-19 situation specifically, a temporary tax and NI exemption has been enacted by the Government. The exemption runs from 16 March 2020 until at least 5 April 2021 and relates to the reimbursement of expenses incurred for office equipment.
You are entitled to have your equipment expenditure reimbursed as long as it was obtained for the sole purpose of allowing you to work from home as a result of the coronavirus outbreak, and the equipment would have been exempt from income tax if your employer had provided the equipment to you directly.
In the event your employer does not reimburse the expenses, then you would be entitled to claim tax relief for the equipment as discussed below.
Tax Relief – who is eligible and what’s covered?
As a taxpayer, you are eligible to claim tax relief from your employment income in the event that you incur business expenses. You are entitled to relief for part of your household running costs if you are employed on a homeworking basis or you have no choice than to work from home, and your employer does not already reimburse any household expenses.
In practise your taxable income is effectively reduced and so therefore is the amount of tax you need to pay. These costs may also be referred to as ‘tax deductible’ or ‘allowable’ expenses.
The HRMC criteria for claiming employment expenses are strict and it is stated that expenses must be incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’.
Common tax relief expenses
Some of the more common expenses that would be eligible for tax relief include:
- Supply of one mobile phone and sim card
- Provision of a new broadband connection (Note that this only applies to a new connection, not an existing one. However, under the current circumstances the fee can be reimbursed by the employer if it is required to work from home and is not already available. Use of the connection must be restricted to business use only.)
- IT equipment and office supplies can be provided or allowed for as non-taxable items. This includes laptops, tablets, computers, and office supplies. Use must generally be restricted to business purposes only and private use should be limited.
Costs which are excluded from tax relief
Certain costs are excluded from tax relief, such as mortgage payments, rent, council tax and water rates. These costs would be the same whether or not the employee works at home and are not therefore eligible for relief.
The tax relief claim process
Once an you have determined that your expenses qualify for tax relief, you will need to make a claim to HMRC. If you do not usually complete a tax return, a claim can be made on form P87. There are two versions available from GOV.UK, one which is solely online using the Government Gateway, and one which requires printing and posting to HMRC.
If the expenses exceed £2,500, then the tax refund claim must be made through a formal Self-Assessment tax return. You would receive a tax refund cheque for any past tax years and would get your tax code adjusted for the current and future years.
The most important aspect to remember is that if you are not a taxpayer, (because your income falls below the personal allowances threshold), you cannot obtain any tax relief.
Council tax versus Business rates
Aside from expense reimbursement and tax relief considerations, there are also other aspects to be aware of when working from home. One such aspect is the implication of business rates. There are certain instances when you work from home or use part of your property for business use, when it’s possible you may be subject to business rates as opposed to council tax.
The deciding factors include elements such as the extent and frequency of business use of the space and any modifications that have been made to allow for that use. Other influencing factors include advertisement of business at the premises and the frequency of client visitations. More information on these determining factors can be found on the Valuation Office Agency’s Council Tax Manual.
Capital Gains Tax (CGT) and private residence relief
A further consideration when using your home for businesses purposes is the impact on Capital Gains Tax (CGT). Tempting as it may be to designate a specific room within the house as office space, you should be aware of the potential loss of CGT relief as a result.
While allocating the space for business use would allow you to claim for additional business expenses, you need to carefully consider whether the tax implications through potential loss of CGT relief. CGT is something that most taxpayers are not liable to following the sale of their main residence, but you may lose this entitlement if the space was designated for business use.
Avoiding the CGT trap is possible though, simply by demonstrating that the room retains dual use. Including a sofa bed, TV or children’s toy area would show that the space has not been restricted for working purposes.
Protection for unreimbursed expenses
Finally, in the event that an employer does not reimburse expenses and your hourly wage is on or around minimum wage, protection is available. HMRC rules dictate that where an employee incurs expenses in connection with employment that are not reimbursed by an employer, the cost is not allowed to reduce their wages below the minimum wage.
Additionally, anyone claiming universal credit (UC) or tax credits, should inform the DWP/HMRC about unreimbursed expenses, as earned income could be reduced your UC or tax credit purposes, meaning a higher award.
HMRC provides extensive guidance on the subject of tax relief and expense reimbursement.
Alternatively, your accountant will be able to advise on the best course of action for your specific circumstances. If you need support or advice on personal tax, please get in touch with our knowledgeable team.