Any business operating remote or hybrid working should consider the potential tax relief and exemptions available to employees working from home.
Employers can make tax-free payments to directly reimburse homeworkers for certain household expenses. Employees working from home may also be entitled to claim a deduction against taxable income for some of their household expenses and travel costs.
Can we make tax free payments to reimburse homeworkers for their household expenses?
Payments made to reimburse an employee's reasonable additional household expenses incurred while working at home can be made tax-free - provided that the employee works at home regularly and you have agreed that they can do so.
HMRC will approve a tax and NI free payment of up to £6 a week to an employee working at home (£26 a month for monthly paid employees) without supporting evidence of the cost. It's not necessary to pro-rate it for anyone only working at home part-time.
You can reimburse a greater weekly amount tax free provided there is supporting evidence to show that the payment is wholly in respect of 'reasonable additional household expenses'. This could include any additional heating and lighting costs; metered cost of increased water use; business phone calls; internet access; home contents insurance; and business rates (if applicable). Costs that would be the same whether or not the employee works at home are not covered. A broadband connection fee can only be reimbursed tax-free where the employee does not already pay for a broadband internet connection at home and needs one to work remotely.
Can homeworkers claim tax relief on household expenses?
Not all employers reimburse the costs of homeworking, however, there is an opportunity for homeworkers to claim tax relief themselves.
Employees can claim tax relief on household expenses if they can demonstrate that they were incurred 'wholly, exclusively and necessarily' in the performance of their duties. This can be a difficult test to meet, particularly as HMRC does not usually allow claims where the employee has at any time had a choice of whether to work from home or not. However, for tax years 2020/21, 2021/22 and 2022/23 a deduction from taxable earnings is allowed for household expenses for the full tax year even if the employee was only required to work from home for part of the tax year (either by their employer or due to government advice on COVID-19).
Deductions can be claimed for additional heating and lighting costs; any metered cost of water used in the performance of duties; and the costs of business telephone calls and business internet connection. Relief can't be claimed for insurance costs.
In October 2020 HMRC launched an online portal giving employees the opportunity to make the claim for tax relief more easily. Employees who satisfy the conditions for relief are entitled to a deduction of £6 per week/£26 per month. Anyone wanting to deduct more than this will be expected to keep records and be able to show how their figure has been calculated.
Employees will get tax relief based on the rate at which they pay tax. For example, if they pay 20% basic rate of tax and claim tax relief on £6 a week, they will get £1.20 per week in tax relief.
If an employee works from home can they claim tax relief on travel expenses for trips to the office?
This will depend on whether the employee works from home full-time or part-time; and how regular their trips into the office are.
The HMRC rules on this are complex and centre on the definitions of 'permanent workplace' and 'temporary workplace':
- A permanent workplace is somewhere the employee attends regularly for the performance of their duties. Attendance is regular if it is frequent or follows a pattern, so that fortnightly travel, for example, is capable of being regarded as regular.
- A temporary workplace is somewhere the employee goes only to perform a task of limited duration or for a temporary purpose. Where an employee has spent, or is likely to spend, 40% or more of their working time at a particular workplace over a period of more than 24 months, HMRC will treat it as a permanent workplace rather than a temporary workplace.
If an employee works from home full-time, they can get tax relief on the unreimbursed travel costs of travelling to the office - provided that the trip is not undertaken regularly and HMRC accepts that the office is a temporary workplace. They can also get relief on the costs of travelling to another temporary workplace such as a client's premises.
If an employee splits their working time between home and the office, then they will have two permanent workplaces and cannot claim tax relief on the costs of travelling between them (as it is treated as ordinary commuting). They will however be able to get relief on the costs of travelling to any temporary workplace.
The only time that tax relief can be claimed for the costs of travelling between home and another permanent workplace is if the location of the employee’s home is dictated by the requirements of the job. Even then, costs are only deductible for travel to the office on days the employee usually works from home.
Is there an income tax charge if we provide employees with equipment to use at home?
If you provide an employee with equipment to use at home in the course of their employment, such as a monitor, keyboard or chair, there is no income tax charge provided any private use is insignificant. The equipment remains your property and should subsequently be returned (if ownership is transferred to the employee, a taxable benefit will arise). This exemption is conditional on you making the benefit available to all employees on similar terms.
Is there a tax exemption if we reimburse employees for the cost of homeworking equipment?
If an employee purchases equipment to use at home in the course of their employment, and you reimburse the cost, generally this does not qualify for a tax exemption. The temporary tax exemption covering home office equipment purchased by employees and reimbursed by employers as a result of COVID-19 (which allowed employees to receive the full reimbursement free from income tax and NICs) only applied from 16th March 2020 until 5 April 2022.