Prefer to Listen? Then check out our Podcast on Tax implications of working from home
Employees working from home regularly may be able to benefit from certain tax exemptions, although this cannot be where they are working informally, HMRC guidance has confirmed that if an employee is working from home due to COVID-19, the definition of a homeworking arrangement for tax purposes, will be met for this period.
Employer payments towards additional household expenditure
Under section 316A, Income Taxes (Earnings and Pensions) Act, if an employee is working from home regularly under an agreed homeworking arrangement, an employer may pay up to £6 per week to the employee tax free, without requiring supporting evidence of the cost.
According to HMRC, a satisfactory ‘homeworking arrangement’ for the purpose of this tax emption is:
- An arrangement between the employer and the employee to work from home; and
- Where the employee works at home regularly in accordance with that arrangement.
The tax exemption will not apply where an employee works from home informally, without such arrangement. Due to this, whilst the arrangement need not be in writing, this is advised for certainty.
HMRC guidance sets out that if an employee is working from home due to COVID-19, a homeworking arrangement will exist for this period.
If an employer pays above £6 per week, the amount in excess must be wholly in respect of additional household expenses incurred by the employee working from home. Any amount in excess must be proved by supporting evidence, otherwise, the excess must be taxed.
Employee claims for additional household expenditure
Employees can also claim tax relief on £6 per week in respect of additional household expenditure directly via a government microsite which was set up in October 2020 for this purpose.
The following eligibility requirements apply:
- The employee must not have the expense paid for already by their employer (as above);
- The employee must not pay tax via self-assessment;
- The employee must be encountering higher household expenditure due to working from home; and
- The employee must have started working from home due to the Covid-19 pandemic.
Employees whose claims are successful will get a new PAYE tax code so that tax relief is automatically applied.
As well as this, if an employee has worked from home at all, even for just one day from 6 April 2020 due to the pandemic; they are able to claim this tax relief for the whole year. This equates to £60 for lower rate tax-payers and £125 for higher rate tax-payers.
When questioned about this provision, HRMC provided the following statement:
"We recognise that the working-from-home situation is very fluid this year, so we're accepting claims for the full year's expenses. That includes even if people have only worked from home for some of the year, to avoid needing to contact us if you have to work from home again."
Many employees began working from home on 23 March 2020, when the national lockdown was announced. The Government microsite, requires you to put in the date that you started working from home meaning that many employees will benefit from an additional two weeks tax relief from the 2019/20 tax year, if they began working from home before 6 April 2020.
Equipment for home working
The Income Tax (Exemption for Coronavirus Related Home Office Expenses) Regulations 2020 introduced a temporary exemption from income tax and National Insurance contributions for expenses reimbursed by an employer to an employee in respect of ‘coronavirus related home office expenses'.
Such equipment must have been obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak. The exemption applies in respect of equipment purchased after 11 June 2020 to the end of the 20/21 tax year.
This is useful to note for employers who are continuing to ask staff to work from home during this third lockdown, as if further or new equipment required to enable employees to work from home, this should be purchased and expensed before 5 April 2021 to benefit from the tax relief.
The provision of one mobile phone and SIM card, paid directly by an employer is tax exempt irrespective of whether the employee also uses the phone for private use.
Broadband payments will be tax exempt exclusively for employees who did not have broadband previously but needed to obtain broadband to enable home working.
In these circumstances, broadband should be exclusively used for business purposes.
Travel from home to a workplace
With many employees having continuously worked from home for 10 months now due the pandemic, some employers have taken the decision to change the place of work clause in employment contracts to the employee’s home address.
If this is the case, employee’s may be entitled to tax relief on travel expenses if travelling from home to other places for work purposes, for example, client sites.
Where the office remains as the contractual workplace, travel between home and the company’s premises is ordinary commuting. If an employer reimburses this expense, this is generally taxable.
For specific advice on contractual place of work, please get in touch with our employment lawyers.