With the existing trend towards working from home accelerated during the lockdown, many people are asking how to save tax working from home because of the additional expenses they may incur.
There are two ways this can happen:
Your Employer Reimburses You For The Expense
Employers can make tax-free payments to help employees cover their reasonable additional costs which have been incurred while working from home. In order to be eligible, the employee must be regularly performing some or all of their duties at home. HMRC guidance states that they will accept that an employee is working at home regularly where this is frequent or follows a pattern such as working there for two days every week. There is no requirement that these days cannot be varied. Informal time spent working at home, which is not part of an official arrangement, does not count as working from home. For example, taking work home in the evenings will not qualify for a tax-free reimbursement of costs. There must be a proper arrangement to work at home rather than on the employer’s premises. Although not essential, it is good practice to have a written agreement.
Any reimbursement can only cover reasonable additional costs incurred by the home-working employee which are defined as:
- the additional costs of heating and lighting the work area;
- the metered cost of increased water use;
- increased charges for internet access;
- increased charges for home contents insurance;
- business telephone calls; and
- business rates (where working at home leads to such a liability).
HMRC also say, ‘The additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent, council tax or water rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations.’
If the employee is already paying for an internet connection there is no additional expense and so the employer cannot reimburse the employee’s internet charges on a tax-free basis. On the other hand, if the employee does not already pay for an internet connection at home and needs one in order to work from home, the broadband fee will qualify as an additional household expense which the employer can reimburse.
There are two possibilities for employer reimbursement of costs in order to save tax working from home:
- Firstly, the employer can pay a fixed £6 per week (or £26 per month) in addition to their salary. HMRC have confirmed that employers who require members of staff to work from home as a result of the temporary closure of their business premises will be able to provide tax-free payments in these circumstances. The advantages of using this scheme are that:
- there is no need for employers to justify the expenditure; and
- employees do not have to keep records of their additional costs.
- Alternatively, if a flat-rate payment is not appropriate, a larger tax-free amount can be paid, subject to the provision of evidence for the additional costs. There are two ways to do this. The first is to calculate a scale rate payment which reimburses the average additional costs of working at home. It is possible to agree this annually and once agreement has been reached with HMRC, employees are not required to keep subsequent evidence of costs. The other possibility is that the employer can reimburse the actual additional costs incurred by the employee, in which case detailed records must be kept.
Either way the employee can save tax working from home.
The Employee Seeks Tax Relief
If employers do not choose to pay or reimburse some or all of their homeworkers’ extra expenses, employees are not automatically allowed tax relief for their additional costs. Tax relief for such costs is only given if they are incurred wholly, exclusively and necessarily in the performance of the duties of their employment. This is true where the following circumstances apply:
- the duties which the employee performs at home are ‘substantive duties’, ie. tasks carried out by the employee which form all or part of the central duties of the employment;
- the duties require the use of appropriate facilities and such facilities are not available to the employee at the employer’s premises (note that this test would be met if the employee lives so far away from the employer’s premises that it would be unreasonable to expect him or her to travel there on a daily basis);
- at no time before or after the drawing up of the contract of employment was the employee able to choose between working at the employer’s premises or elsewhere.
This represents a significantly more stringent set of rules to enable you to save tax working from home. However, if the employee can show that his or her home is a genuine workplace, relief can be claimed for the same sort of expenses as the employer can reimburse.
So there are ways to save tax working from home but you may need advice on the most appropriate route for you to take.