With so many people now settled into working from home and this becoming part of normal life going forward for many businesses, it is worth thinking about how practices can help their employees with the running costs of a home office to support them without incurring any unnecessary benefits in kind. This would also cover directors and shareholders of a law firm that is trading as a limited company.
What businesses can do for their employees
HMRC has recently updated their guidance on employee home working expenses following the significant changes in working practices, to help provide guidance as to what expenses can be reimbursed without incurring a benefit in kind. The guidance states that no liability to income tax arises when an employer makes a payment to an employee in respect of reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home and where a ‘home working arrangement’ exits. There have been many discussions on the definition of home working arrangements due to the current circumstances, and HMRC has accepted that during the duration of the period where people are required to work from home if they can, that employee satisfies the necessary tests.
Therefore, an employer can make a tax-free payment to an employee of £6 per week (£4 per week up to 5 April 2020) whilst the employee is working from home in response to COVID-19.
Although £6 per week does not sound like very much in comparison to the running costs of the house, it will be sufficient in most cases, as it is designed to only cover the additional costs for heating and lighting the work areas as well as internet access and business telephone calls. However, greater amounts can be paid where the employee provides the employer with evidence to justify them and the employer agrees to pay that greater amount.
Going forward, when office life returns to the ‘new normal’, in order to continue to pay this amount so it is treated as being a tax-free allowance, there must be some home working arrangements in place. Contracts of employment will need to be reviewed to ensure that this is included, or there will need to be some other formal agreement with the employee, preferably in writing, agreeing when they will work at home and when they will be in the office. It is fine for an employee to work at home for, say, two days per week but work in the office for three days and still claim the allowance, but not for the employee to work at home informally, such as choosing to take work home in the evenings.
Other typical expenses that are incurred as a result of working from home are as follows:
Mobile phones and sim cards
If you are providing a mobile phone and sim card without a restriction on private use, this has to be limited to one per employee and the contract for the mobile phone needs to be in the business’s name. If these criteria are satisfied, the cost of running the mobile phone is not taxable.
If an employee already pays for broadband, then no additional expenses can be claimed. However, if a broadband internet connection is needed to work from home and one was not already available, then the broadband can be provided and paid for by the employer, although any private use must be limited.
Unfortunately, as most employees will already have broadband, if there is a reimbursement of broadband costs even if this is an upgrade to allow them to work more effectively, this will create a benefit in kind, which is taxable on the employee.
IT and office equipment
The provisions of laptops, computers, tablets and office furniture provided by the business are not taxable on the employee, as long as they are mainly used for business purposes and ownership remains with the employer.
In some circumstances, an employee may pay directly for office equipment, such as a desk or a printer, and the business may reimburse either the employee or the supplier. Ordinarily, this would be a taxable benefit, which can be included on a PAYE settlement agreement, so the employer settles the employee’s liability. However, a new measure has been introduced for amounts reimbursed between 16 March 2020 and 5 April 2021 whereby the payment will be exempt provided:
a) the equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the virus; and
b) provision of the equipment would have been exempt from tax had it been provided to the employee by the employer.
In all other cases, if you are making arrangements to assist staff with equipment to use at home, it is important that the business buys the equipment and not the employee.
What about unreimbursed household costs?
In some circumstances, the employer may not reimburse the additional household expenses whilst an employee is working from home, as the employee is ’saving’ in commuter costs. If this is the case, an employee can make a claim directly to HMRC for tax relief for their unreimbursed expenses, but in order to do this they must demonstrate that the amounts incurred are wholly, exclusively and necessarily in the duties of employment. The difficulty here is substantiating the necessity element of this criteria, and this can only be met when all of the following circumstances apply:
- The duties that the employee performs at home are substantive duties of employment, i.e. they are central duties of their work.
- Those duties cannot be performed without the use of the appropriate facilities.
- No such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect him or her to travel to those premises on a daily basis).
- 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.
Interestingly, the latter two points are now easier to satisfy because of COVID-19, as employees have no choice to work other than from home at this point in time.
If the expenses are below £2,500, a form can be filed with HMRC to claim relief against earnings. If, however the expenses are above this, a tax return will need to be filed under self-assessment.
The change in working patterns gives a practice the opportunity to look at remuneration packages in a slightly different way and to provide benefits that would be tax free in the hands of the employee if dealt with correctly.
For more information on the allowances for working from home or support for your law firm, please get in touch with Patricia Kinahan at firstname.lastname@example.org or 01242 23766