So many have worked from home over the last six months, and may be set to continue to some extent – tax barrister Sarah Woodall looks here at how that affects your tax status and what you can claim in expenses or for working equipment.
Q: Can you summarise the law for self-employed people claiming expenses in respect of working from home?
A: Yes. Generally, as long as they are wholly and exclusively attributable to the business, self-employed people are entitled to a deduction for business running costs, which are likely to extend to rent, business rates and office running costs. In addition to home office costs such as stationery or phone and internet bills, the work from home costs typically include a proportion of costs of the home office such as gas, electricity, council tax, mortgage interest and business rates. Home office equipment may also be deducted as capital expenses.
Q: Is the law for employed people claiming expenses for working from home different?
A: Yes, this is a bit more difficult.
An employee must be obliged to incur expenses under his/her employment and the expenses must be incurred “wholly and exclusively” “in the performance of” duties of the employment. These constitute “substantive duties” that represent all or part of the central duties of the employment, according to HMRC.
Generally, no deduction will be allowed if the employee works at home by choice. Council tax/rent, mortgage interest and insurance are not eligible. The additional unit costs for electricity, gas and metered water consumed in the home office, along with costs of business telephone calls and internet access made exclusively for the purposes of employment duties, may be deducted for tax purposes.
However, for ease of administration, HMRC does allows employees to claim a deduction of £6 per week/£26 per month (as from 6 April 2020 – for prior tax years 2011/12 to 2019/20 the rate that could be claimed was £4 per week/£18 per month) for eligible homeworking expenses (in addition to the cost of business telephone calls including internet access) without requiring supporting records to be produced.
If employers reimburse the additional costs of working from home, then the expenses incurred are not deductible by employees.
The deduction for an employee’s homeworking expenses is separate from the exemption which applies to certain homeworking payments which employers may make that are tax-free, and NIC-free to employees who work at home under “homeworking arrangements”.
Q: If the principal place of work for an employee shifts, do opportunities for claiming expenses also change?
A: Potentially, yes. Understanding the concept of “principal place of work” is important. It is only possible to deduct expenses for business use of your home if your home is your principal place of work. Shifting the principal place of work can have consequences for claiming travel expenses.
Travelling between home and permanent workplace
HMRC says the ‘place at which an employee works is a permanent workplace if he or she attends it regularly for the performance of the duties of the employment.’ Perhaps counterintuitively, it is not possible for employees to deduct travel costs for ordinary commuting, i.e. travelling between home and permanent workplace, or any other place that is not their workplace. That rule applies even when the employee does some work at home, and even if they are entitled to relief for the additional expenses of working at home.
However, there is an exception if the employee is required to work at home. If the employee’s home is accepted as a workplace for tax purposes, the employee may be entitled to relief for expenses of travelling from home to a permanent workplace in respect of the same employment. Such journeys may count as travelling “in the performance of the duties” of the employment. However, if an employee’s home is a workplace for only part of their working time, a deduction can be permitted for the cost of travel between home and a permanent workplace only during those times that the employee’s home is a workplace. This relief is relevant to travel between workplaces and travelling appointments, and travel between home and work where home is a workplace and the place where the employee lives is dictated by the requirements of the job.
Employees who work at home are entitled to a deduction for the expenses of travelling to a temporary workplace in the same way as any other employee.
Travelling between home and temporary workplace
A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose. Travel to a temporary workplace is not ordinary commuting and so the cost is deductible.
For self-employed individuals
While business travel by train, bus, plane or taxi, and hotel rooms and meals during overnight business trips are deductible expenses, the cost of travelling between home and work is not a deductible expense.
However, for self-employed individuals who work from home, i.e. their home is their permanent workplace, the mileage may be a tax–deductible expense when the employee travels from home (permanent workplace) for work related purposes. HMRC insist on evidence that “substantive duties” are performed from home on a regular basis.
Q: Can you give examples of what amounts to a change in the principal place of work?
A: Yes. A workplace is defined as ‘a place at which the employee’s attendance is necessary in the performance of the duties of the employment’. The focus is on the purpose of the attendance (rather than on the purpose of the journey).
Employers could be affected where their employees are working from home due to coronavirus, either because the workplace has closed or they are following advice to self-isolate.
Q: Can you give some examples of domestic expenses that may newly become allowable expenses for employees as a consequence of the pandemic?
A: Yes. Employers may provide additional equipment or benefits to employees as a result of having to work from home or other consequences arising from the Covid-19 outbreak. The tax treatments are as follows:
Office equipment purchase
As a special measure for the Covid-19 pandemic, the Treasury announced on 13 May 2020 that employees who purchase home office equipment to work from home would benefit from a temporary tax and NIC exemption in respect of the reimbursement on such expenses by the employer. Furthermore, any private use of the reimbursed equipment should not be significant. These may include laptops, tablets, computers and office supplies. The expenditure must meet two conditions to be eligible for relief:
- equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak, and
- 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.
It is a temporary measure and the relevant legislation took effect from 11 June 2020 until the end of the tax year 2020/21, although the period was backdated to 16 March 2020 – the date from which homeworking officially started – on a discretionary basis.
If the employee is not reimbursed by the employer, then they can claim tax relief for these purchases on their tax return or P87. It is important to keep records of the purchase and claim for the exact amount.
If an employee does not already have broadband and it is needed for work purposes (private use must be limited), the provision of such broadband access by the employer is non-taxable. However, reimbursing expenses purchased for home use would be taxable.
Again, perhaps counterintuitively, if an employee already pays for broadband, then no additional broadband expenses can be claimed.
If you would like advice on your tax affairs, please contact Sarah Woodall on 07384 118 426 or at [email protected].