Homeworking: more taxing than it seems
One of the lasting consequences of COVID-19 could be a fundamental shift in working practices across the country with many people continuing to work from home long after the lockdown eases, writes Heather Tulloch, Senior Tax Manager Ashcroft Partnership LLP.
This new breed of ‘homeworker’ might be wondering to what extent they can be reimbursed by their employer for additional household costs. The options are summarised below.
It is important that both the employer and the employee understand the tax implications and reporting requirements.
Fixed rate allowance
The simplest option: an employer can reimburse any employee who works from home (at least once every week) for “additional” household costs incurred, up to a cap of £6 per week.
Provision of tools or services
Another option is the exemption that allows employers to provide employees with tools or equipment that are needed to carry out their duties: for instance, a set of tools for a tradesman or IT equipment and office furniture for an office worker.
For the exemption to apply, the private use of the assets should be insignificant, and the employer must purchase it directly, rather than reimburse the employee for the purchase cost.
A similar exemption exists for the provision of any services that are required for employees to work from home, provided that any personal use of the services is “not significant” and the contract for the services is between the employer and the supplier. An example would be the provision of a telephone line at home to be used solely for making business calls.
An alternative to the fixed weekly rate of £6 is the reimbursement by an employer of any additional costs incurred, such as an increase in utilities bills from additional heating and lighting.
The exemption only applies to expenses incurred “wholly, exclusively and necessarily” by the employee in the course of doing their job, so it will not cover the employer contributing to fixed household expenses such as mortgage interest or council tax, or any contribution to costs that are not based on the actual usage, such as fixed monthly broadband or phone costs.
All the above are exempt benefits, but any other contributions from employers to employees are likely to trigger tax charges and reporting requirements.
A director-shareholder who is running a business from home may not be happy with the £6 a week exemption, nor with the administrative and national insurance burden of preparing a P11d (required where a business is meeting some of the fixed costs of running the property).
The solution is for the business to rent part of the house from the homeowner. In these circumstances, the rent will be a deductible expense for the business and the homeowner will have rental income that will need to be reported on their self-assessment return. The homeowner can claim a proportion of the house running costs against the rental income.
Carefully calculated, the net rental income arising in the hands of the individual will be minimal and, since it is property rather than employment income, there will be no National Insurance.
It should be noted that any rooms that are used exclusively for the business will restrict the principal private residence relief available to mitigate capital gains tax on a future sale of the property and trigger a liability to business rates. Caution is advised!
The most appropriate method will depend on the circumstances. For most employees, the fixed rate allowance and specific exemption for the provision of equipment will be sufficient, but for those incurring significant costs, such as owner-managers running a business from home, the rental agreement option should be considered.
What is clear is that, as our working patterns change and we become more flexible and agile in our working practices, the tax considerations around working from home will become more relevant.
For further information on any of the above, please contact Heather Tulloch, Senior Tax Manager at Ashcroft, on 01763 209113.