Homeworking And Tax Relief For Employees

Homeworking and Tax Relief for Employees: A Guide

With homeworking becoming increasingly common, it’s important for both employees and employers to understand the tax rules regarding homeworking expenses. At AHACCOUNTANTS, we help employers and employees in the Nottingham area navigate these rules and ensure compliance while maximizing tax efficiency.

Homeworking and Tax Status

Your employment status is critical when considering tax relief for homeworking. The rules differ significantly between employees and the self-employed. This guide focuses on employees.

Good record-keeping is essential for avoiding unexpected tax bills. If expenses aren’t recorded properly, HMRC can demand repayment of unpaid tax, including interest and penalties, years later.

General Rules for Employee Expenses

As a general rule, any costs paid on behalf of or reimbursed to an employee by their employer are taxable. Employees can claim personal tax relief on expenses incurred for their job, but only if they meet the strict requirement that costs are incurred “wholly, exclusively, and necessarily” for their employment. This can be a difficult hurdle to clear.

Employer-Provided vs. Employee-Purchased Items

Tax rules are more generous when an employer provides equipment or reimburses an employee directly, as opposed to the employee purchasing items and claiming tax relief. Employers should seek professional advice to structure homeworking arrangements in the most tax-efficient manner.

Exemption for Homeworking Expenses

Employees who regularly work from home under a formal agreement with their employer may qualify for an exemption allowing tax-free payments for household expenses. These include:

• Heating, lighting, and water usage in the work area
• Increased internet or phone costs due to business use
• Home contents insurance related to business activities
• Business telephone calls
• Potential liability for business rates

HMRC does not allow tax deductions for fixed household costs like mortgage interest, rent, or council tax for employees.

A flat-rate of £6 per week (effective from April 2020) can be claimed without needing detailed records. For higher amounts, employees must provide proof of additional costs.

Personal Tax Relief for Homeworking Expenses

If the employer does not cover homeworking costs, employees can try to claim personal tax relief on the expenses, but this is difficult. To qualify, employees must meet strict criteria, including:

• Performing the main duties of their job from home
• Lack of appropriate facilities at the employer’s premises
• No choice between working at the employer’s office or from home

Given these complexities, it’s typically more advantageous for employees to negotiate tax-free payments from their employer rather than relying on personal tax relief.

Equipment and Capital Allowances

If employers provide equipment for homeworking (e.g., laptops, desks, chairs), they can claim capital allowances, provided the equipment is mainly used for business purposes. If private use of the equipment is insignificant, no taxable benefit will arise for the employee.

Travel Costs

While HMRC acknowledges home as a workplace for tax purposes, commuting expenses are not generally tax-deductible unless the travel is to a temporary workplace. For example, travel to a temporary client site may qualify, but commuting to the company office will not.

Permanent workplaces are defined as places where an employee works for more than 24 months or the majority of their employment. Commuting to such a location is considered a personal expense.

Example: Jane and Her Husband

• Jane works late and takes work home by choice, but she cannot claim travel costs between her home and her employer’s office because there’s no requirement to work from home.
• Jane’s husband, on the other hand, works as an area sales manager and uses a home office for administrative work. He can claim tax relief for travel between his home and the company office in Newcastle because his home is an essential workplace for his job.

Key Takeaways

• Record keeping is crucial: Always keep detailed records of any costs incurred for homeworking.
• Understand the rules: Homeworking expenses must meet strict criteria to be tax-deductible.
• Plan ahead: Employers should provide tax-efficient benefits to employees, and employees should aim to receive tax-free payments rather than relying on personal tax relief.