Updated: 21 October 2020
The current coronavirus (COVID-19) lockdown measures have resulted in more people working from home than ever before.
Employees who have been forced into this homeworking arrangement have seen an increase in their household bills such as electricity, heating and water charges.
Prior to the lockdown and where a contractual homeworking arrangement existed, an employer could pay to the employee a ‘reasonable amount’ to cover these additional costs of working from home free of income tax.
Without any evidence as to what is a ‘reasonable amount,’ HMRC allowed employers to pay employees a flat rate amount of £4 per week, rising to £6 per week from 6 April 2020, to cover the additional expenses which is exempt from income tax and national insurance contributions.
Previous HMRC guidance confirmed that a homeworking arrangement exists between an employer and an employee where the employee regularly performs some, or all, of their duties from home. The guidance suggested that this needed to be more of a formal agreement rather than working from home on an ad-hoc basis, and it should be frequent, or follow a pattern but each case will be considered on its merits by HMRC, depending on the circumstances.
New HMRC guidance on employee claims for homeworking tax relief
On 27 March 2020, Jesse Norman MP, financial secretary to the Treasury, confirmed in a reply to a Parliamentary question that employees who work from home could claim a tax deduction of £6 per week from 6 April 2020, or £4 per week for periods before that. This came as a surprise to tax advisers, as until that point HMRC had been clear that flat rate claims for tax relief by employees were not permitted.
On 15 May 2020, HMRC changed the guidance in its employment income manual to say that from 6 April 2020 “for ease of administration” it will accept that employees who are required to work at home can claim a deduction of £6 per week (£26 per month), without having to justify that figure. For years before 2020/21 HMRC will accept claims for deductions amounting to £4 per week (£18 per month).
This means that employees can submit claims to HMRC for homeworking expenses, without having to calculate the additional costs of their household bills or keep evidence of those costs. HMRC accept that the four statutory conditions for claiming this tax relief are met where the following circumstances apply:
- the duties that the employee performs at home are substantive duties of the employment. “Substantive duties” are duties that an employee has to carry out and that represent all or part of the central duties of the employment;
- those duties cannot be performed without the use of appropriate facilities;
- no such appropriate facilities are available to the employee on the employer’s premises; and
- 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.
The current lockdown means that most if not all employees working from home under the coronavirus lockdown measures will satisfy the above conditions.
If the employee wants to claim more than the flat rate of £6 per week, evidence of the additional household costs will be required.
How employees can claim homeworking tax relief
Employees who complete a self-assessment tax return can make a claim for their additional homeworking costs under the section in that form titled “using your home as an office”.
Most employees are not required to submit a tax return, so they can claim the tax deduction for homeworking expenses either online via the government website, by post on form P87, or by phoning HMRC on 0300 200 3300.
Additional homeworking tax exemption for employees buying equipment
Employees who are working from home due to coronavirus (COVID-19) may need to purchase their own home-office equipment and employers who encourage their staff to do this may reimburse the expense.
However, the current rules mean that where an employee buys their own home-office equipment and is reimbursed by their employer, they will currently not be entitled to tax relief. This is because the expense incurred puts the employee in a position to perform their duties and is therefore not incurred in performance of their duties.
The government want to support employees and employers in this situation, so they have created a temporary Income Tax and National Insurance contributions exemption for employer reimbursed expenses that cover the cost of relevant home-office equipment.
Home-office equipment is the equipment deemed necessary for the employee to work from home as a result of coronavirus, including a laptop, desk or necessary computer accessories.
The exemption will ensure that employees can receive the full reimbursement of such costs free from tax and Class 1 NICs and this temporary exemption will apply from 11 June 2020 until the end of the tax year 2020-21. HMRC will exercise its collection and management discretion and will not collect tax and NICs due on any reimbursed payments made from the start of the lockdown on 16 March 2020 provided the relevant conditions set out in the legislation are met (see below).
For the expenditure to be eligible for relief, it must meet the following 2 conditions:
- that equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak
- 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
The exemption will be conditional on the benefit of any reimbursement in respect of home-office equipment expenses being made available to all of an employer’s employees generally on similar terms.
The temporary tax exemption will mean that employees can purchase the office equipment necessary for them to work from home without worrying about the tax and NICs consequences, and employers will no longer need to report the reimbursed expense which would normally be liable to tax and NICs.