Meg Saksida looks at the tax effects of an employee home working
More and more of us are doing it; but what are the tax implications of working from home, and are there any pitfalls?
Homeworking arrangements
An employee can work at home either voluntarily (if this is allowed by their employer) or as requested as part of their employment. An employee will, however, have additional costs that they would not usually have if they were working at the office. Such additional costs would include those for extra heat and light in the area you work, or extra electricity and water (if you are on a meter).
There may also be additional phone costs, more printer cartridges, and sometimes insurance companies charge a premium if any ‘business’ is carried out at home. If enough work is done at home to incur business rates, these too would be an example of increased costs.
Costs that are fixed and do not increase due to homeworking (e.g. the cost of providing a phone line or the internet) would not be examples of additional costs as they would be incurred by the employee, whether or not they worked at home. However, if the employee did not have an internet connection prior to the homeworking and it needed to be installed only for the homeworking, this would be an additional cost.
Other costs such as rent, mortgage payments and interest and water rates (not a water meter) would be excluded, again because they won’t increase due to the homeworking. The cost of making the home ready for an employee to work at home would also not be an example of additional costs. Renovations, furniture or office equipment are too far removed from the home working to be relevant incremental costs.
Is it ‘reasonable’?
From 6 April 2003, employers are able to make ‘reasonable’ payments to employees to cover such costs as long as the costs were incurred in carrying out the employee’s duties. These are tax-free receipts where the homeworking is part of an arrangement where the employee ‘regularly works at home’.
The employer is not restricted by statute as to how much they can pay for such expenses, and furthermore, no records normally need to be kept. However, HMRC states that where payments exceed £208 a year (i.e. £4 a week), the employer should keep records to prove that the higher payments were required to reimburse the extra costs of working from home, and those costs could be seen as ‘reasonable’.
If the employee genuinely requires more than this standard amount, by keeping a detailed record of costs for one year proving their higher requirement, they can agree on a scale rate with their employer (which could potentially rise with inflation every year) to avoid the need to keep such records annually. Alternatively, the precise costs incurred may be reimbursed. In these instances, evidence of the costs will need to be retained by the employer every year in order to be prepared for an HMRC challenge.
Deductible costs that are not part of the homeworking arrangements scheme
The tax-free income above is only an exemption through payments made to the worker by their employer for the employee’s additional expenses. The employee can deduct such additional expenditure themselves from their income if such homeworking payments are not offered by their employer, but the tests are much more stringent. This means that just because an amount may have been received tax-free by the employer for the expenditure of the employee under the homeworking arrangement, it may not be deductible by the same employee working for another employer in the absence of the homeworking arrangement.
If an employee is not offered the homeworking costs by their employer, they can deduct the costs under a different part of the income tax legislation. According to HMRC, this will be the case where, for example:
- The work that is done from home is a ‘substantive duty’ of the employment. ‘Substantive’ here means that these are such duties that are integral to the worker’s role and central duties of the employment. Case law has also shown that these are duties more associated with revenue earning for the employer and if only clerical or administrative activities are carried out at home, these tasks are unlikely to meet the definition of substantive. Even if work is preparatory to the main role, it may not be defined as substantive. The test is a tough one.
- The duties require such a surrounding as is provided within the home to perform such duties.
- Either the work cannot be done at the office/employer’s premises or it is such a distance from the employee’s home that it is unreasonable to ask them to travel there every day.
- There was no choice at the time the employment contract was entered into for the employee to choose where they worked.
If all four criteria are evident, it is likely that homeworking costs will be able to be deducted, but lacking even of one of them will make it unlikely (although there is always recourse to the tribunal and courts if an individual feels strongly that they satisfy the conditions of the legislation). Overall, it is easy to see that if one simply chooses to work at home, there will be no deduction available.
There are some individuals for whom HMRC have accepted that working from home would be substantive, and those employees would generally be eligible to deduct their expenses. Examples of these are university lecturers, councillors, examiners, ministers of religion, and midwives.
What expenses can be deducted?
The costs to be offset must first and foremost be ‘wholly and exclusively and necessarily’ in the performance of the employee’s duties for the purpose of the employment.
This means only the additional costs of home working are deductible, such as the increase in light and heat costs while working from home rather than (say) the appropriate proportion of the square meterage of the house the home office uses, and never such charges as council tax or rent that would be paid anyway.
Even though this is not the homeworking scheme described above, for ease of calculation of all the expenses, HMRC accepts that a deduction of £4 a week (exclusive of the cost of business calls) would be reasonable. Again, if an employee required more than this, records would need to be kept but this time by the employee, not the employer.
Note that the costs of the employee travelling from home to office are never allowable expenses as this is, irrespective of how often the employee works at home, classified as ‘ordinary commuting’.
What about capital gains tax?
If you have used a large part of your home exclusively for business purposes, this will affect the private principal residence exemption for capital gains tax purposes, and that ‘just and reasonable’ proportion will become chargeable (with possible mitigation through rollover relief). However, if you have only received income tax relief on the additional expenses of a part of your house that you continue to use as a home when you are not working, the exemption will not be affected.
Practical tip
Working from home is a modern phenomenon and one that appears to be only becoming more popular. Be aware that if your employer does not offer the homeworking alternative, the probability of being able to deduct even the additional expenses you incur is greatly diminished.
