Tax update: homeworking and employment tax considerations

Homeworking has become the norm for many of us over the past year. Our tax advisors, RSM, explain what implications this new way of working could have for you and your employees.

Many of us have been required to work from home since last March and while lock down restrictions will start to be lifted over the coming months, it seems likely that homeworking, at least to some extent, will become the new norm for many in the sector.

In this article we provide an overview of employment tax reliefs, covering both temporary coronavirus relief and more general considerations related to home working.

Home office equipment

Under existing rules, if an employer provides an employee with home office equipment, for example desks or printers, for the sole purpose of enabling the employee to perform their employment duties, and any private use of that equipment is insignificant, the provision of the equipment should be exempt from tax and National Insurance Contributions (NIC).

As part of coronavirus support measures, the government announced that from March 2020 a temporary tax and NIC exemption will apply ensuring that no tax liability arises where employers reimburse employees for their personal expenditure on home office equipment. This is subject to the condition that the equipment is obtained to enable the employee to work from home as a result of the coronavirus outbreak.  Whilst this relief was originally intended to only apply for the 2020/21 tax year it was announced in the March 2021 budget that it will be extended until 5 April 2022.

Household expenses

An employee’s household expenses, such as the cost of broadband, business telephone calls, and heating and lighting are likely to have increased as a result of working from home.

Under existing rules, where the employee is working from home under a homeworking arrangement, and the costs are incurred in carrying out the duties of the employment, the employer can reimburse the employee for the cost of certain additional household expenses tax and NIC free. Employers should, however, note that this exemption cannot be applied where the payments are made in conjunction with a salary sacrifice arrangement. Additionally, this exemption excludes costs that remain the same regardless of whether the employee works at home, such as rent, mortgage interest, and council tax.

This exemption can only be applied where there is a ‘homeworking arrangement’ between the employer and the employee, under which the employee works at home regularly. This requires a formal agreement to be in place and for the employee’s homeworking to be frequent and/or follow a pattern.

In response to coronavirus restrictions, HMRC issued guidance in March 2020 confirming that these rules for exempt household expenses can be applied when an employee is working from home due to the coronavirus.

Can we reimburse an employee’s household expenses without asking them for evidence?

Yes, but only up to certain limits.

HMRC recognises that it can often be difficult to identify and calculate the additional cost of an employee’s household expenses that are attributable to the employee working from home.

To address this employers have, for several years, been able to make a maximum tax and NIC free flat-rate payment  to employees to cover their household expenses without the employee or the employer having to provide supporting evidence of the expenditure. This is currently up to £6 per week or £26 per month.

As noted above, HMRC have confirmed that payments at these rates can be paid tax and NIC free when an employee is working from home due to the coronavirus.

What happens if we choose not to meet employee’s household expenses?

Many employers are not in a position to be able to reimburse actual household expenses or to pay the flat rate allowance. In this situation the Government allow employees to make a personal claim for tax relief and this can be made online via the HMRC website. HMRC stipulate that relief may be due where the employee started working from home because of coronavirus and the employer has not met any household costs or paid the allowance.

What else do we need to think about?

One of the most common questions about homeworking is what impact the easing of lockdown restrictions will have on an employee’s ability to claim travel expenses. This is a complex area and it is important to consider whether you need to amend your expense policy to take account of homeworking and any impact on an employee’s permanent workplace.

If you have any questions about homeworking tax considerations then please get in touch with Policy Leader, Paul Butler, using the details below.