In the current “lockdown” environment enforced by the government in response to Covid-19, there has been a huge rise in the number of people working from home instead of heading into the office every day. It’s fair to say the Charter Tax “office” dogs are very happy with the new working arrangements, and are delighted their owners have decided to stay at home to give them even more attention.
Now that most staff are working from home, you may be wondering what reliefs might be available for employees and what payments employers could be making to employees to cover their costs of working from home.
Homeworking Arrangements – Employer payments
Where employees work at home under an agreed homeworking arrangement (which many will be doing at present while offices are closed), employers can pay up to £6 per week or £26 per month tax-free or £26 per month without requiring any evidence to support the actual costs to the employee. This rate applies from 6 April 2020, with a rate of £4 per week or £18 per month applying before this date. Incidental working at home (e.g. working overtime at home in the evening) doesn’t usually constitute a homeworking arrangement, so this allowance may not be appropriate for those still working at the employer’s premises for their usual working hours.
If an employer wishes to pay a higher amount to their employees, they will need to keep supporting evidence to show that the payment is wholly for additional household expenses incurred due to working from home. This would include the additional costs of heating and lighting the home office (although In reality this can be difficult evidence to collect) and the cost of business telephone calls if these can be itemised from telephone bills.
Costs that an employee would already be paying (such as mortgage interest or council tax) would be excluded, as in many cases would broadband costs if there is a fixed contract in place which does not vary by reference to usage. Any excess payment that cannot be substantiated by evidence from the employee would be taxable on them.
Given the difficulty in collecting the supporting evidence required to make a higher payment, it is often simplest to pay the tax-fee allowance mentioned above, which should cover an employee’s costs in most cases.
Homeworking Arrangements – tax relief for employees
The £6 per week allowance discussed above is tax-free for the employee, however what if this does not cover all of the additional expenditure an employee is incurring?
Employees may be able to make a claim for tax relief on the difference between their actual additional household costs and the amount reimbursed by their employer. Again, supporting evidence must be kept to show that the additional expenses have been incurred “wholly, exclusively and necessarily” in the performance of their employment duties. Where an employer’s offices are closed due to Covid-19 and employees have no choice but to work at home, HMRC are likely to agree that this constitutes a situation where tax relief on excess expenses can be claimed.
Provision of Equipment to an Employee
Where an employee receives equipment from an employer as a gift or at a discount, usually a “benefit-in-kind” arises. This would be reported on a P11d by the employer (incurring class 1a national insurance for the employer) and the employee would pay tax on the value of the gift or discount. Similarly, if an employer provides an employee with the use of an asset, a benefit-in-kind arises and the employee is taxed on a value calculated as 20% of the cost of the asset. There are however some exemptions available which may be of use in the current working from home response to Covid-19.
Equipment provided solely to carry out employment duties are exempt from tax, as long as any private use in “insignificant”. So if you have provided your employees (or as an employee have been provide with); laptops, computer screens, headsets, printers etc that are needed to work from home, and any private use on these items is insignificant, there will not be an income tax charge on the employee, and this does not need to be reported on a P11d by the employer. This exemption does not however cover the provision of a motor vehicle (or boat or aircraft!) or alterations to living accommodation/ construction of a building.
Mobile Phones and Home Telephone Costs
An employer can provide a employee with one mobile phone and sim card tax-free, as long as the contract is arranged and paid by the employer. There is no restriction on private use on the mobile phone provided.
If however an employer pays an employee to use their own mobile phone, or settles the cost of a phone contract in the employee’s name, these arrangements would be taxable on the employee. Where possible, employers should review their current arrangements and ensure that their arrangements for providing mobile phones is tax-efficient by providing the phone to the employee themselves.
Where an employee incur an extra cost for business calls (i.e. calls that are not covered by the standard phone contract or inclusive minutes) then these can be reimbursed by the employer if itemised records of the calls are maintained. If the cost of these additional calls is not reimbursed by the employer, then the employee can claim tax relief on the unreimbursed cost.
A similar rule would apply to home telephone costs – payment of additional itemised business calls will be tax-free, but paying an employee’s usual line rental cost would be taxable on the employee. If an employee had a second telephone line installed which was solely for business use, then this could be reimbursed by the employer and not treated as taxable earnings of the employee.
Reimbursement of Employee Expenses
Reimbursement of expenses incurred wholly, exclusively and necessarily for the performance of employment duties (these are the magic words you may have heard your accountant declare to you many times before!) are not taxable. Employees purchasing stationery, stamps, printer cartridges etc. can therefore be reimbursed for this expenditure without a tax charge.
Payment of Taxes
An Employer is able to settle the taxes due on benefits-in-kind on behalf of the employee via a PAYE settlement agreement. Benefits-in-kind which are not dealt with under a PAYE settlement agreement must be reported on a P11d each year, or processed through the payroll in some cases.
For more information on payments or benefits for employees, or for help arranging a settlement agreement or preparing P11ds, please do get in touch.
