Tax reliefs and allowances for working from home

With many employees now working all or at least part of their time from home, the lasting legacy of Coronavirus may be more permanent home working arrangements for many.

As a result of home working, employees are likely to incur additional household expenses, as well as needing equipment to enable them to work from home safely and effectively. In this article we consider the various tax reliefs available to help with these costs.

Your tax position will depend on whether you are employed or self-employed and, if employed, whether you pay for these expenses personally or whether they are paid by your employer. The rules are rather complex and so this article only looks at the position for expenses incurred by an employee or sole trader.

 

Employment

You can claim tax relief for expenses incurred personally where you satisfy the following three conditions:

1. You are obliged to incur the expenditure (ie you cannot choose to pay for something because of personal preference).
2. The expense is incurred in the performance of your duties. Any expenses incurred in putting you in a position to carry out the employment, prior to the commencement of the employment or that are of a preparatory nature, will not qualify for any tax relief.
3. The expense must be incurred ‘wholly, exclusively and necessarily’. This means that it must relate to the employment only, there can be no duality of purpose. In addition, it must be an expense that would be necessary for anybody holding that employment to incur.

HM Revenue & Customs (HMRC) will generally accept that the above conditions apply where the duties performed at home are substantive, they cannot be performed without the use of appropriate facilities, no such appropriate facilities are available at the employer’s premises and the employee cannot choose to work at home.

If one or more of those conditions is not met it is unlikely you will satisfy the statutory tests. Consequently, there are likely to be limited circumstances where tax relief will be available to you.

What types of expenses can I claim?

Where it is accepted that your home is your workplace, you can claim any additional running costs, such as heating, lighting, metered cost of water, the unit cost of business telephone calls etc. Fixed costs such as insurance, Council Tax, water rates, mortgage interest/rent are not allowable, as these would be incurred regardless of whether your home is your workplace. In addition, it is unlikely that costs for purchasing equipment to enable you to work from home would be allowable on the basis that the equipment is putting you in a position to perform your duties.

There has been a recent change due to the Coronavirus pandemic where employers are able to reimburse employees for costs incurred in purchasing equipment as a result of the pandemic, to enable them to work from home, (eg laptops, computers, tablets, chairs, desks etc). These costs can be reimbursed tax free. If you have incurred such expenses, it would be worthwhile checking with your employer if they are willing to reimburse you (available up to 5 April 2021).

In reality, it can be difficult to quantify the additional expenses incurred by working at home and so HMRC accepts you are able to deduct £6 per week/£26 per month (from your taxable income) from 6 April 2020 for each week you are required to work at home without the need for any supporting documentation. Prior to that, the amount was £4 per week/£18 per month. If you wish to deduct more than £6 per week (£4 per week up to 5 April 2020), you must keep records and be able to show HMRC how your figure has been calculated.

Self-employed

If you are self-employed, the test determining whether you can claim a deduction for household expenses is not quite as onerous as it is for employees. In this instance, the expense must be incurred “wholly and exclusively” for the purposes of your trade (ie part of your home is used to run your business).

As for employees, it is possible to claim a tax deduction for the additional running costs of working from home, such as heating, lighting, metered water, cleaning etc. These can be a proportion of actual expenses, with detailed records and calculations required. Alternatively, an unincorporated business is entitled to claim a flat rate of expense without needing to keep any supporting documentation.

The amount allowed on a monthly basis depends on the number of hours worked at home and is calculated as follows:

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This does not include costs for phones or internet, nor fixed expenses such as mortgage interest, rent, insurance, repairs and maintenance, Council Tax etc. Unlike employees, the self-employed can claim a proportion of these fixed expenses where an identifiable proportion can be attributed to business use, usually apportioned by area and time. Care is needed to ensure that a room is not used exclusively for business purposes as this could result in a capital gains tax liability on an eventual disposal of the property.

Phone and internet costs can be claimed based on the unit cost of business calls as well as a proportion of line rental and broadband based on the business use percentage. Where private use is not significant, the full cost of telephone and broadband can be claimed.

Any equipment acquired for use in the business, such as computers, laptops, desks, chairs etc can also be claimed as a capital allowance, based on the proportion of business use. Where the expenditure qualifies for the annual investment allowance (AIA) and falls within the annual limit (£1 million up to 31 December 2020, falling to £200,000 thereafter) a full deduction for the business element will be allowed in the year of purchase.

The rules surrounding the tax relief available for home working costs are complex and differ depending on your status. Tax relief is much harder to claim for employees but can be achieved in specific circumstances. Where relief is not available for employees because the tests are not met, it is worth discussing with your employer whether they will reimburse you for any additional homeworking costs incurred.

For further advice on any issues raised here, please contact your usual Saffery partner.