This article has been updated as at 1 February 2021.
Over the past few weeks, businesses and employees have adapted to the "new normal" of remote working, and have grappled with everything from bad internet connections to the etiquette of virtual business meetings. With recent news suggesting that social distancing is probably going to be part of our lives for quite some time, businesses and employees may wish to consider how to mitigate the costs of employees working from home for an extended period. From increased heating bills to extra office equipment, many of these costs can be moderated, but employers and employees should bear in mind the limits to what can be given and the tax consequences of doing so.
Can employers reimburse employees for the costs of working from home?
Employers can reimburse employees who are obliged to carry out their duties from home for their reasonable costs in doing so, without incurring a tax charge. To be eligible, an employee must be regularly performing some or all their duties from home, not just working from home in the evening or weekends of their own volition. This would usually be under specific homeworking arrangements agreed in writing with the employee, but HMRC guidance has confirmed that working from home because the office has closed due to the pandemic, or because individuals are following advice to self-isolate, will qualify.
Can employees claim tax relief on expenses incurred working from home?
If an employer is unwilling or unable to reimburse these costs, then employees can claim some tax relief to cover their expenses, but the circumstances in which an employee is entitled to relief are more restrictive. In order to do so an employee must need to work from home on a regular basis. Guidance suggests that in order to qualify the duties carried out at home must be substantive, cannot be performed at the employer’s premises, cannot be completed without the use of the items deducted, and there can be no such facilities available to that employee on the employer’s premises. At no time before or after the employment contract is drawn up should an employee be able to choose to work from home. Although this is generally quite a stringent test, HMRC have confirmed that they will in practice be more lenient during 2020/21 where the employer has mandated some element of working from home either full time or part time.
What costs can be reimbursed or claimed?
Whether claimed as tax relief by an employee or reimbursed tax-free by an employer, the items to be considered are those that are genuinely required or have increased due to the need to work from home. These can include items such as the heating or lighting required in the area in which an individual works within the home as well as additional insurance, metered water and in some cases, internet access charges. It is important to remember that costs that would remain the same regardless of an individual’s working arrangements, such as council tax or mortgage payments, would not be considered expenses incurred in working from home, and cannot be reimbursed.
However, a more stringent test is applied to tax relief requested by employees than to tax-free reimbursements by an employer. In order for the expense to be tax deductible by an employee, any expenses incurred must be “wholly, exclusively and necessarily” incurred in the performance of their duties. Although, similar items are likely to be deductible, there are many (such as insurance) that may not be included.
What about IT equipment?
Provided there is no significant private use by the employee, employers can purchase additional office equipment for employees and this will not result in a taxable benefit. Under normal circumstances if an employee purchases IT or other equipment, which is reimbursed by their employer, this would be a taxable benefit with income tax and NICs due. However, given the requirement to work from home, the government has provided a temporary exemption from this charge until the end of the tax year. This exemption applies where employees have been reimbursed for expenses incurred with the sole purpose of enabling an employee to work from home during the outbreak. Although this only applies for those amounts reimbursed on or after 11 June, the government has suggested that HMRC will exercise its discretion for claims made from 16 March.
How much can be reimbursed or claimed?
If employers wish to reimburse their employees for the reasonable costs tax-free, then employees will generally need to keep receipts and this evidence would need to be provided to claim back the relevant amount. However, reimbursement payments of £6 a week for those employees paid weekly or £26 a month for employees paid monthly (please note that the sums were £4/£18 respectively, prior to 6 April 2020) will be approved by HMRC and do not need to be justified. Since October, employees can now also use HMRC’s government gateway to directly claim relief of £6 a week or £26 a month if they have been required to work from home at some point during the 2020/2021 tax year, without needing to keep receipts to justify their expenses.
If you require further information about anything covered in this blog, please contact Katjana Cleasby, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2021