Tax in the Age of Homeworking

Let's start with a recap

At the start of the pandemic - in March, 2020 - a temporary exemption was put in place to enable employees - forced to work from home as a result of COVID restrictions - to buy home office equipment and have the cost reimbursed by employers without risk of incurring income tax or NI.

Despite the, globally acknowledged fact that working from home for some or all of the week is now normal practice, this temporary exemption was brought to an end by the UK Government from 6 April this year.

So, as an employer, what do you need to do to make sure you won't fall foul of HMRC, while still reaping the benefits of a flexible workforce?

6th April 2023 onwards...

Employers are able to make tax-free payments to help employees cover additional 'homeworking' expenses incurred essentially light, heat and electricity while working from home. Eligible payments are not subject to either income tax or national insurance.

What is homeworking?

To be eligible, the employee must be carrying out the duties of their employment under homeworking arrangements. This is not defined but basically means that the employee is regularly performing some or all of their duties at home for an indefinite or limited period.

Informal working at home that is not by arrangement does not count as homeworking. For example, taking work home in the evenings will not enable the employee to qualify for tax-free reimbursement of costs. There must be an arrangement to work at home and not at the employer's premises, and it is good practice for this to be in writing.

Provision of Home Office Equipment & Connectivity

It is generally accepted that working solely on a laptop for long periods is poor practice, and can lead to discomfort and back back pain. Many homeworkers will need additional equipment including monitors, keyboards and even desks and chairs in order to make a functional office space. Employers and employees need to be aware though, that the tax position is significantly affected depending on how it is paid for. While a welcome concession applied in 2020/21 and 2021/22, to allow employees to reimburse costs, this ended from 6th April, 2022.

Employer purchases

Where the employer has purchased and 'provided' any necessary equipment to an employee, as long as there is no significant private use, no taxable benefit in kind arises on the employee.

If there is a significant private use, then a benefit in kind will arise and so employers may wish to ensure that their employment policies make clear that significant private use is not permitted.

When or if the employee returns to the workplace and ceases to use the asset at home, some consideration will need to be given to what happens to the employer's property. If the property is returned to the employer, there will be no tax consequences. But if the employee keeps the asset and ownership of the asset is transferred from the employer to the employee then a benefit in kind could arise based on the market value of the asset at the time. If the employer does not wish the employee to suffer a tax charge, one option might be to include the asset transferred on a PAYE Settlement Agreement which would mean the employer would cover the tax costs of transfer but there are time limits for applying for a PSA. Otherwise a P11D and benefit in kind charge for the employee will result, which will need to be managed between the employer and employee.

Employee purchases

Where an employee purchases their own equipment personally and the employer reimburses them, this can cause tax issues as the reimbursement will be viewed as taxable income, subject to income tax and national insurance. Following the concession for 2020/21 and 2021/22, this should generally now be avoided.

Staying connected

For cost such as broadband internet connection, HMRC says that if the employee is already paying for a connection before starting working from home then this is an existing expense and cannot be reimbursed tax-free. If, however, the employee is not connected to broadband and needs a connection to work from home, then this would qualify as an additional cost which the employer could reimburse tax-free.

The same principles apply to the cost of the domestic landline rental. Only additional costs incurred by the employee as a result of homeworking can be reimbursed by their employer tax-free.

excemption for household expenses

Reimbursements can only cover reasonable additional costs incurred by the homeworking employee. There are two main approaches:

Firstly, the employer can pay the following fixed amounts:

•£6/week for weekly paid employees; or

•£26/month for monthly paid employees.

The advantage of paying at these rates is that there is no need for the employers to justify the expenditure and the employee does not need to keep records of their additional costs.

The weekly flat-rate amount applies equally to part-time or hybrid workers and it is not necessary to pro rata it because the employee does not work at home full-time.

If the flat-rate is not appropriate, then a larger tax-fee amount can be paid subject to provision of evidence for the additional costs.

Allowable costs include:

•additional heating and lighting costs

•additional insurance

•metered water

•telephone or internet access charges

•business rates (if applicable)

Only the increase in costs incurred by the employee can be reimbursed. Costs that would be the same whether or not you work at home cannot be included. Such costs might include:

•mortgage interest or rent

•council tax

•water rates

The employer is also not permitted to reimburse, tax-free, any costs to enable the employee to work from home, such as building alterations.