The tax issues to consider when paying homeworking costs when HMRC comes to call
As part of an HMRC enquiry, HMRC is stating that a benefit in kind would arise for paying an employee more than the flat rate amount of £312 per year for use of home as office expense. This is despite being able to show the additional unit costs of utilities, etc, making up the use of home expense claim.
Is it the case that a benefit in kind would indeed arise on the excess over £312, or is HMRC mistaken?
There may be some overlap here between the exempt homeworking payments under section 316A Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and the availability of income tax relief under s336 for the additional costs of working from home which are reimbursed by the employer.
Homeworking exemption under s316A ITEPA 2003
For reimbursements of more than £6 per week to be exempt under s316 ITEPA 2003, there must be arrangements between the employer and the employee, and the employee must work at home ‘regularly’ under those arrangements.
‘Regularly’ in this context means where working at home is frequent or follows a pattern. For example, where an employee agrees to work three days each week on the employer’s premises and two days at home.
The exemption does not apply where an employee works at home informally and not by arrangement with the employer. It applies where an employee works at home by arrangement with the employer instead of working on the employer’s premises.
In addition to the need for formal arrangements, evidence must be retained to show how the amount of additional costs arising from homeworking have been calculated.
Further guidance on the exemption is provided in the HMRC manual EIM01472.
Deduction for income tax under s336 ITEPA 2003
The next step is to look at whether a deduction is available under the general rules for employment expenses in s336 ITEPA 2003.
These require the expense to have been incurred wholly, exclusively and necessarily in the performance of the duties of the employment. HMRC considers these tests to be met where:
- the duties that the employee performs at home are substantive duties of the employment. These are duties that an employee has to carry out and that represent all or part of the central duties of the employment, rather than say preparatory duties such as background reading in advance of a meeting;
- those duties cannot be performed without the use of appropriate facilities and 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 them 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 any one of these tests is not met, for example because the employee has the ability to choose whether they work from home rather than from the employer’s premises, then a deduction is unlikely to be available in respect of the reimbursement of additional domestic costs.
HMRC provides some examples of how these tests are applied to various circumstances see examples below.
The examples on this page concern the availability of a deduction under section 336 ITEPA 2003 for the additional expenses incurred in working from home. Guidance on the availability of a deduction in these circumstances can be found at EIM32760.
Example 1 – substantive duties
A member of an NHS trust board attends meetings of the board in Exeter. She has no office facilities available to her in Exeter to prepare for meetings. She receives papers from the NHS trust at her home in Salcombe and reads the papers at home. This takes several hours and she would not be able to take a full part in meetings if she did not do this work at home. She requests a deduction for the cost of travel between her home and her permanent workplace in Exeter.
No deduction should be permitted for either the costs she incurs while working from home or the cost of travel. Her work at home is preparatory in nature and not part of the duties of her employment. Home should not be accepted as a workplace.
Example 2 – nature of duties requires employee to live at a distance from employer’s premises
A is an area sales manager who lives in Glasgow. He manages his company’s sales team in Scotland. The company’s nearest office is in Newcastle, and A therefore carries out all his administrative work at home where he has set aside a room as an office. The administrative work is part of the substantive duties of his employment. A is entitled to relief for the additional costs which he incurs as a result of working at home. The nature of his job requires him to live in Scotland, where no employer-provided office facilities are available.
Example 3 – employee working at home by choice
B works for the same company as A. He is the company’s sales manager for the North East of England. The company would be happy for him to work from its offices in Newcastle, but they have agreed that B can work from his home in Durham, where he has set aside a room as an office. B is not entitled to a deduction for his homeworking expenses because he is working at home by choice.
Example 4 – nature of duties requires employee to live at a distance from employer’s premises
The company which employs A and B decides to close its regional offices and to operate solely from its head office in London. B is still the area sales manager for the North East of England and he continues to work from his home in Durham. The work that he does at home is part of the substantive duties of his employment. Following the closure of the Newcastle office he has no practical alternative but to provide himself with office facilities at his own expense. B is now entitled to relief for the additional costs which he incurs as a result of working at home.
Example 5 – employee working at home by choice
A is promoted to become the company’s national director of sales. That is normally a head office job. However A is a fervent supporter of his local football team and rather than relocate to London he persuades the company to allow him to continue to work from home. A is no longer entitled to a deduction for his homeworking expenses because he is now working at home by choice.
Example 6 – voluntary homeworking scheme
C works at his company’s offices in Leeds. His home is in Kings Lynn and he spends the week in Leeds, travelling home at weekends. His employer then introduces a homeworking policy under which those employees who wish to do so can work from home. C accepts the offer and thereafter works from his home in Kings Lynn, where he sets aside a room for use as an office. He is not entitled to a deduction for homeworking expenses because he is working at home by choice. (This example is based on a real case: Kirkwood v Evans, 74TC148, see EIM32374.)
Example 7 – contract reflecting employee’s personal choice
D lives in Gloucester and applies for a job with a company whose offices are in Birmingham. The company are happy to pay his expenses of moving from Gloucester to somewhere on the outskirts of Birmingham. However D does not want to disrupt his children’s schooling, or to commute between Gloucester and Birmingham, so he asks the company if he can work from home. The company agrees, and D’s employment contract says that he will be home based. He sets aside a room for use as an office. D is not entitled to a deduction for homeworking expenses because he is working at home by choice. The contractual term requiring him to work at home is simply an expression of his personal choice.
Example 8 – no appropriate facilities at employer’s premises
A company employs a team of sales people whose job is to follow up sales leads by telephone. The company trades from two small offices which house the director, her secretary and two clerical staff. There is no room for the sales team, who are recruited specifically on the basis that they will work from home. The members of the sales team are entitled to a deduction for the additional costs which they incur by working at home.
Example 9 – personal choice
The company in example 8 becomes so profitable that it is able to move to larger premises. New recruits to the sales team are required to work at the company’s premises. Existing team members who live within daily commuting distance are invited to do so. Those who decide to continue to work from home are now doing so by choice, and are no longer entitled to a deduction for a proportion of their household costs.
Example 10 – UK representative of foreign company
E is the UK sales representative of a Dutch company. The company does not have an office in the UK so E is recruited on the basis that he will work from home. He is entitled to a deduction for the additional costs that he incurs as a result of working at home.
Example 11 – appropriate facilities available at employer’s premises
F is a teacher at a secondary school. During term time she regularly takes work such as marking exercises home to complete in the evenings and at weekends. However she has free periods during the school day and the school has rooms available where she can mark papers if she wishes to do so. F is not entitled to a deduction for the expenses of working at home because appropriate facilities are available on her employer’s premises. She may feel that those facilities are inadequate, but that is not enough to satisfy the statutory test, see EIM70735. It is not an objective requirement of her job that she should perform any of her duties at home.
Example 12 – claiming tax relief when you work from home
Amber works for an advertising company and is based at their Birmingham office. Following the outbreak of COVID-19, her employer tells her to work from home, to comply with legal Covid restrictions set by the UK Government. She does this for the tax year 6 April 2020 to 5 April 2021.
Amber’s employer does not pay her for the extra household expenses she incurred while working from home. As Amber has no choice but to work from home, given the legal Covid restrictions, she meets the tests set out in section 336 of the Income Tax (Earnings and Pensions) Act 2003. Therefore, Amber can claim tax relief for these extra costs, from HMRC.
During the tax year 2021 to 2022, the Government lifts the restriction to work from home. Amber’s employer offers hybrid working. This allows Amber to choose if and when she wants to work from home, or in the office. Her employer amends her employment contract to reflect this.
As the Government has lifted the restriction to work from home, Amber no longer satisfies the tests in section 336. This is because she can now choose if she works from home or not, even though this arrangement is part of her contract.
But Amber can continue to receive tax relief for her homeworking expenses, for the full tax year (6 April 2021 to 5 April 2022), even though she’s only been required to work from home for part of the tax year. She can do this under the ‘time-limited easement’ because she meets the tests in section 336 for part of the tax year.
The time-limited easement allows you to claim tax relief for homeworking expenses for a full tax year, even if you’ve only been required to work from home for part of that tax year. However, you’ll no longer be able to do this, when the time-limited easement ends on 5 April 2023.
See guidance on homeworking payments,
Homeworking arrangements’ are defined as arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home (ITEPA 2003, s. 316A(3)). There is no requirement for any part of the employee’s home to be used exclusively for the purposes of the employment; if any part of the home is so used, then part of the capital gains tax exemption on the disposal of the house may be lost (see ¶540-000ff.).
HMRC state (at EIM01472) that they will accept that there are homeworking arrangements where:
- there are arrangements between the employer and the employee; and
- the employee works at home regularly under those arrangements.
HMRC guidance goes on to say 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.’
HMRC accept that an employee works at home regularly when working at home is frequent or follows a pattern. For example, where an employee agrees to work three days’ a week at the employer’s premises and two days at home. This will be so even if the days the employee works from home vary (EIM01472).
See guidance on homeworking expenses,
‘Household expenses’ are defined as expenses connected with the day-to-day running of the employee’s home (ITEPA 2003, s. 316A(3)). The exemption applies to additional household expenses, and HMRC gives the following guidance (at EIM01474):
‘Typically, this will include the additional costs of heating and lighting the work area or the metered cost of increased water use. There might also be 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.’
In Baird v Williams (HMIT) (1997) Sp C 122 the taxpayer failed to obtain a deduction for mortgage interest under what is now ITEPA 2003, s. 336 (see ¶454-000ff.). The inspector contented that the office imposed a duty on the clerk to maintain an office, but it did not impose a duty to borrow money to purchase an office. The special commissioner held that the interest payments did not fall within the predecessor to ITEPA 2003, s. 336 and thus dismissed the appeal.