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COVID-19: Employment tax consequences of working from home

Nick Irvin, Employment Tax Assistant Manager
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The issue of coronavirus is both a national and global concern, with the many countries in lockdown. As a result of advice from government, many businesses have closed workplaces and required that their staff work from home wherever possible.

This article considers the income tax consequences for employers and employees when working from home, and how the coronavirus could impact these rules.

The rules for employers

Employers may make payments exempt from tax to employees for reasonable costs they incur while working from home if:

  • there are arrangements between the employer and employee
  • the employee must work at home regularly under those arrangements.

If this is the case, the employer can make payments exempt from tax for the additional costs of heating and lighting the work area, the metered cost of increased water use, increased charge for internet access, home contents insurance or business telephone calls.

HMRC will permit payments exempt of tax of:

  • up to £6 per week or £26 per month without the employer having to justify the amount paid or
  • the actual additional costs incurred by the employee.

As long as an arrangement is made for the employee to work from home, and the employee does so regularly, employers will be able to make reasonable payments to their employees exempt from tax to cover the costs set out above.

The rules for employees

For employees, the rules are more restrictive and will depend on any amounts already reimbursed by their employer.

Employees may be permitted a deduction from their earnings for the costs of working from home if the expense has been incurred wholly, exclusively and necessarily in the performance of their duties. HMRC will consider that these conditions are met if:

  • the duties the employee performs at home are substantive duties of the employment (for example, they have to be carried out and represent all or part of the central duties of the employment)
  • those duties cannot be performed without the use of appropriate facilities
  • no such facilities are available to the employee on the employer’s premises
  • at no time before or after the employment contract is drawn up can the employee choose between working at the employer’s premises or elsewhere.

Clearly, these conditions will normally only be met by a very small proportion of those who work from home, as typically the arrangement is for convenience rather than a requirement of the job. If an employer encourages or allows their employees to work from home due to concern around the virus, this would not meet the conditions for an employee to claim a deduction for their expenses.

However, the position following government guidance around COVID-19 could change this.

To obtain tax relief, the employee must have agreed to work from home in their contract or they must work from home because they have no choice to go to their workplace. This could apply if the employer does not have available office space for all employees. Even if the office is not open to an employee one day a week, as long as the employee incurs household expenses which aren’t reimbursed, they can claim tax relief.

If these conditions are met, employees can deduct from their earnings:

  • the additional unit costs of gas and electricity consumed while a room is being used for work
  • the metered cost of water used in the performance of duties
  • the unit costs of business telephone calls (including dial up internet access).

These costs can often be difficult to quantify, so HMRC will instead accept a deduction of £6 per week or £26 per month (excluding the cost of business telephone calls). If the employee wishes to deduct more than this, they must keep records to show how their figure has been calculated. 

A recent change in HMRC’s web form has provided guidance saying that you can now apply for tax relief for the whole of this tax year via a P87, even if you do not know how much longer you will be working from home, and you go back to your workplace before 6 April 2021. HMRC confirmed that at the end of the tax year, the tax relief will stop and any further relief will need to be claimed in the new tax year.

We expect that HMRC will release further details on this subject soon including advice for the periods that can be claimed for those who claim relief via their self-assessment tax returns.

Some employers may reimburse their employees for the cost of working from home. Employees can only claim a deduction for the amounts of expenses that haven’t been reimbursed by the employer.

Employees can claim a deduction for these expenses in a self-assessment return or, if claiming for less than £2,500 of expenses in a single tax year, completing a form P87 online at GOV.UK.

Other working from home considerations

Employers may provide additional equipment or benefits to employees as a result of having to work from home or other consequences arising from the COVID-19 outbreak. A broad outline of the tax treatment of these are set out below.

Mobile phones and SIM cards – For those without a restriction on private use, limited to one per employee, this is non-taxable.

Laptops, tablets, computers, and office supplies – If these are mainly used for business purposes and not significant private use, these are non-taxable. The government has announced a temporary tax exemption and National Insurance disregard (until April 2021) to ensure that home office equipment purchase by employees will not attract tax and NICs liabilities where reimbursed by the employer.

Two conditions must be met, namely 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 it had been provided directly to the employee by or on behalf of the employer (under section 316 of ITEPA).

The easement is backdated to 16 March 2020 and will run until 5 April 2021. Further guidance is expected from HMRC in the coming weeks.

Broadband – Only if the employee does not already have a broadband internet connection and one is needed to work from home, the provision of this would be non-taxable. In this case, the broadband is provided for business and any private use must be limited. Otherwise the provision of broadband or is taxable.

Reimbursing expenses for office equipment your employee has purchased for home use – Where the office equipment wouldn’t normally be provided due to the item being used primarily for private purposes, the reimbursement should be treated as earnings via the payroll. 

Temporary accommodation – If the employee needs to self-isolate, but cannot do so in their own home, reimbursing hotel expenses and subsistence costs would be taxable.

Company car benefit – If an employer provides a car to an employee, the benefit charge associated with this car will continue unless agreed otherwise. If the car is still ‘made available’ to the employee (irrespective of whether it is actually used) the benefit is still being provided. In addition, employers may wish to consider the new car benefit rates for zero-emission vehicles.

Employees using their own vehicle for business – Employers can pay approved mileage allowance payments of 45p per mile up to 10,000 miles (25p per mile thereafter) free of tax. Employees can claim tax relief on mileage costs if their employer does not reimburse them up to the approved mileage allowance payments.

Employer provided loans – A salary advance or loan from an employer to help an employee at a time of hardship counts as an employment-related loan. Loans provided with a total value less than £10,000 in a tax year are non-taxable.

If you are unsure on the tax treatment of working from home, or have any other employment tax queries, our Employers Advisory Group would be happy to assist.

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Andy Hamman
Andy Hamman
Director, Employment Tax