Over recent years a growing number of employees work from home and this working practice will now become the new norm for many of us, as we try and continue to work through these challenging times.
Naturally, understanding the tax reliefs you can claim when working from home will be an area of interest, especially where bills and other expenses may increase as a result of home working.
This article confirms the rules as they currently stand and at this point in time it is not known if the Government and HM Revenue & Customs (HMRC) will look to make any changes in this area, to cover those having to work at home due to the Coronavirus.
As the current rules stand, what you can claim for and how you claim it depends on your employment status.
If you are employed
For employees, there are two groups: those who have to work at home and those who choose to work at home. The primary area of legislation relevant here is ITEPA 2003.
Employees who have to work from home
For those who have to work at home, they will have substantive duties at home, they will typically have a role where they have no alternative but to work from home and their home will be designated within their employment contract as their main workplace because the workplace cannot be elsewhere. This would include cases where the nature of the job requires the employee to live far from the employer’s premises and it would be unreasonable to expect them to travel to those premises on a daily basis. There are a number of examples within the HMRC manuals to help determine whether someone is having to work at home or choosing to work at home. https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim32790
The legislation provides a deduction for costs incurred by those who have to work at home (ITEPA 2003 s336). The requirements are that the expenses must be incurred ‘wholly, exclusively and necessarily in the performance of the employee’s duties.’ (It is not enough for the expenses to just be relevant to the employment or incurred in connection with the work.)
Allowable costs include:
- additional heating and lighting costs
- additional insurance
- metered water
- telephone calls (although line rental is not allowed)
- internet access (although only in the event this is not already in place)
- possibly travel costs to main company premises
Costs that would be the same whether or not you work at home cannot be included i.e. mortgage interest, rent, council tax and water rates. Although if additional borrowing is incurred to finance the creation of workspace, interest will be allowed so long as HMRC’s original tests are passed with s336.
Where is it not practical to calculate these extra costs then a claim for £18 a month or £4 per week (going up to £6 from 6 April 2020), can be made without having to justify the figure. However, business calls are not included in this and for which an additional claim can be made based on actual costs.
To make the claim the taxpayer can complete a section within the personal tax return, or their employer could reimburse all or most of the expenses. If only part is reimbursed the rest can be claimed through the tax return.
Employees who choose to work from home
For those who choose to work at home, through a home working arrangement, they cannot claim for reimbursement under s336 as there is no obligation to work from home. However, they may benefit from tax free reimbursement by their employer.
Employers can make tax exempt payments to employees for the additional household expenses incurred through regularly working from home (ITEPA s316A). The relief covers payments as listed for employees who have to work from home under s336, but does not include building alterations and travel costs from home base to the main company premises.
ITEPA s316A allows the employer tax-free reimbursements up to £4 a week (going up to £6 from April 2020) without the need for supporting paperwork. If reimbursements are higher then these must be justified and detailed records kept by the employee or agreed with HMRC.
No relief is given for occasional working at home or informal arrangements, such as work completed at home in the evenings or on the weekends. To qualify there must be some sort of home working agreement where the employee regularly works at home.
In addition, s316 ITEPA does provide the tax-free provision by an employer of goods and services. This may be useful as it allows the provision to employees of supplies and services such as:
- office furniture and equipment such as desks, filing cabinets, fax machines etc, and;
- stationery and normal office or workshop materials and supplies
Therefore, if you choose to work from home you can only receive relief for the costs incurred if you have an arrangement in place with your employer, they reimburse the expenditure and the expenditure meets the conditions. If you do not have this agreement with your employer, you cannot make a claim for this on your self-assessment tax return.
If you are self-employed
The deductibility of expenditure for unincorporated businesses; the self-employed including traditional partnerships, is guided by the ‘wholly and exclusively’ test (ITTOIA 2005 s34). Expenses need to meet this criteria to qualify.
We also need to consider that the individual does actually work from home i.e. do they have a shop or office they actually work from, to determine the amount of home costs which will be allowable.
If the individual is considering a home office or garden pod then they will also need to be aware that capital costs or conversion costs will not qualify for tax relief under the capital allowances regime beyond the costs of wiring and other services, office furniture and moveable partitions.
In terms of general household costs a self-employed taxpayer can claim, these are as follows:
- Council Tax
- mortgage interest or rent
- internet and telephone use
The taxpayer will need to find a reasonable method of dividing their costs i.e. by number of rooms used for business, or amount of time spent working from home.
In terms of HMRC’s interpretation of the above, they give some useful examples in their guidance and it indicates even there is some use of home for business purposes, even if there is a base elsewhere, there is potential for a modest claim. https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim47825
One point that is important to flag is there are Capital Gains Tax (CGT) considerations of using a room exclusively for business and this can result in part of your home being exposed to CGT on sale, so the self-employed need to be mindful of seeking advice on this point.
If you are self-employed and work from home for more than 25 hours a week, you may be able to use HMRC’s simplified expenses system, which provides a flat rate amount per month you can claim dependant on the number of hours your work at home. The details are outlined on HMRC’s website: https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home
This doesn’t include telephone or internet expenses but the taxpayer can still claim the business proportion of these costs by working out the actual costs.
There are also rules for those who use their business premises as their home, such as guesthouses, bed and breakfasts, small care homes etc: https://www.gov.uk/simpler-income-tax-simplified-expenses/living-at-your-business-premises
There is relief available and if you are an employee you need to consider carefully if you have to work at home, have a working arrangement to work from home, or you are simply choosing to without agreement.
For the self-employed you may wish to ensure that you make the most beneficial claim, be that an actual proportion of costs each year or the flat rate scheme and weigh up the tax saving versus the time of gathering this information.