Working From Home – Tax Relief

Tax relief may be available where a person has had to work from home. Given Covid-19 has repeatedly forced the country into lockdown, a large number of people have had to take their work to their place of residency. The consequence for many workers is the increase to their bills. Fortunately, there are options available.

Option 1: The employer reimburses costs

Given that the employee is performing some or all of their duties that they’re hired to do, the employer can reimburse them for additional costs incurred. They can either do this by A). paying a fixed amount to an employee or B). they can pay the exact amount of extra costs incurred above one’s standard weekly cost.

A) Should they elect to reimburse via the fixed tax-free payments, the following is allowed:

  • £6/week for employees that are paid weekly
  • £26/month for employees that are paid monthly

Note that there is no need for the employee to provide evidence for extra costs incurred when a fixed rate is applied.

B) Where they elect to pay the exact amount of extra costs, evidence must be provided for the additional costs incurred via bills/receipts/contracts etc. The following are examples of allowable expenses:

  • Additional heating and lighting costs
  • Metered water
  • Additional insurance
  • Telephone or internet access charges

Option 2: The employee claims tax relief

If the employer does not reimburse the additional costs, the employee can claim tax relief when they incur extra costs that are wholly, exclusively and necessarily incurred for the purpose of work without which the employee could not be expected to produce a suitable standard of work.

Costs that can be claimed include heating/lighting, metered water, telephone bills etc. These are indeed similar to those that are allowable expenses reimbursed by an employer. The calculation must be apportioned based on the number of hours worked and the rooms used.

Capital Expenditure

Usually costs of company equipment for employee use might result in a charge as a benefit in kind. When said employee works from home, the treatment differs and they do not receive the increase to income tax. Importantly, the equipment should not be used privately in any significant way. Examples of typical equipment might include a monitor, chair or keyboard.

When an employee purchases equipment for use at home to complete their work and the employer reimburses the cost, there generally would not be a tax relief available. However, temporary rules have been introduced due to Covid-19. From 16/03/2020 until the end of the 21/22 tax year, these costs are covered for relief.

Self-employed

Those that are self-employed must abide by different rules. Expenses when working from home can be calculated using A). the flat rate or by B). attaining actual costs incurred (similar to the choice an employer has of reimbursing a cost to their employee).

A) The flat rate is based on the number of hours one works from home each month.

Hours of business use per month Flat rate per month
25 to 50 £10.00
51 to 100£18.00
101 and more£26.00

B) When analysing actual costs, the expenses must be apportioned based on a couple factors:

  • how many rooms in the house are used for business against how many total rooms there are
  • the amount of time spent in the rooms for business against their total time

The proportion of rooms used for business and the time spent in those rooms for business is applied against the cost of allowable expenses.

Converting a space into a place of work

It might be that one decides to convert, say, their garage into a home office for work. Again, this should be considered from the perspective of someone who is self-employed and those that are employed by a company.

When someone is self-employed, they may incur costs that are eligible for capital allowances. Whilst a Structures and Buildings Allowance (SBA) does exist for the construction cost of new commercial structures, it should be noted that this is not available for the construction of home offices within a dwelling (residential property). However, there are some costs which qualify as plant and machinery. The following are some examples of expenditure that qualify and some relief can be claimed for:

  • Thermal insulation
  • Integral features of a building such as electrical systems, water systems, heating and cooling systems, and external solar shading.
  • Building alterations, incidental to installation of plant and machinery

Where home offices exist, it will be hard to prove to HMRC that the space is used solely and wholly for business purposes. Given this, a self-employed tax payer should be prepared to calculate the proportion of the use that actually applies to business and then apportion this against the allowance available. Whilst on the topic of proportioning the business use, this would also apply to calculations made to capital gains tax (Principle private residence relief in particular) if the property is eventually sold. Therefore, the taxpayer should pay due care in making a correct assessment of the private/business use.

Where an employee has incurred capital expenditure on such work, no capital allowance is available for them given that they are not a business. What they will instead see is a benefits in kind provided should the employer reimburse them. This occurs due to reasons stated earlier – it would be very difficult to prove to HMRC that a room was used solely for business use.

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