When an employee works from home, their employer might choose to pay their homeworking expenses, or provide them with benefits which will enable them to work from home more effectively. The tax and National Insurance Contributions (‘NIC’) treatment of such expenses and benefits should always be carefully considered, even when the employee is working from home because of the coronavirus.
Why is this so important now?
Given current circumstances with the coronavirus, many more employees than normal will be working from home, either because their employer’s workplaces have closed or to comply with government advice on social distancing. Many more employers will therefore also be providing these employees with homeworking expenses and benefits for the first time.
The rules on whether such expenses and benefits are exempt from tax and NIC vary depending on the nature of the expenses and benefits being provided, and employers should take care to ensure that taxable expenses and benefits are identified and reported to HMRC in the appropriate way.
Can home office equipment be provided tax free to employee?
Where an employer provides an employee with home office equipment (for example desks, printers, monitors, monitor stands etc) for the sole purpose of enabling the employee to perform their employment duties, and any private use of that equipment (either by the employee or members of their family or household) is insignificant, the provision of the equipment should be exempt from tax and NIC. Employers should, however, take care to document any policy about the use of the equipment and ask employees provided with equipment to agree to that policy.
It is important to note that this exemption will only apply to items that an employer owns, or has otherwise entered into a contract for, and then made available to an employee. It will not generally apply where an employer reimburses the employee for the cost of such equipment which the employee has acquired themselves. Such a reimbursement should normally be subjected to tax and Class 1 NIC under PAYE when reimbursed. However from 16 March 2020 and for the 2020-21 tax year a temporary tax and NIC exemption will apply ensuring that no tax liability arises where employers reimburse employees’ personal expenditure on home office equipment arising from arrangements to work from home during the coronavirus outbreak providing that equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak, and it would have been exempt if it had been provided directly to the employee by the employer.
Can an employee’s household expenses be reimbursed tax and NIC free when they are working from home?
An employee’s household expenses, such as the cost of broadband, business telephone calls, and heating and lighting their work area, might also increase as a result of working from home.
Where this is the case, the additional household costs are reasonable, the employee is working from home under a homeworking arrangement (see further below), the employee’s home is a workplace, and the costs are incurred in carrying out the duties of the employment, the employer can reimburse the employee for the cost of those additional household expenses tax and NIC free. Employers should, however, note that:
- this exemption cannot be applied where the payments are made in conjunction with an optional remuneration arrangement (such as under salary sacrifice);
- this exemption excludes costs that remain the same regardless of whether the employee works at home (for example rent, mortgage interest, and council tax), and excludes other expenses which might put the employee into a position to work at home (for example alterations to their home to accommodate a home office);
- this exemption only applies to payments made by the employer to reimburse qualifying additional expenses. It does not entitle an employee to claim a tax deduction for household expenses which have not been reimbursed by their employer (this requires much more restrictive tests to be satisfied);
- the HMRC guidance states that reimbursed broadband costs only qualify where the employee did not already have a broadband connection in their home (which would be unusual) but needs one in order to work from home. The rules on reimbursing home broadband costs are, therefore, more restrictive; and
- HMRC will require the employee to provide evidence of the additional costs they are incurring and for the employer to retain that evidence on file. If an employer cannot produce such evidence when requested, HMRC can take the view that the exemption should not have been applied and seek to recover the underpaid tax and NIC from the employer.
As highlighted above, this exemption can only be applied where there is a ’homeworking arrangement‘ between the employer and the employee, under which the employee works at home regularly. This requires a formal agreement to be in place and for the employee’s homeworking to be frequent and/or follow a pattern (informal and/or ad-hoc homeworking does not qualify). We recommend that homeworking agreements are documented in writing. HMRC guidance issued on 26 March 2020 confirms that these rules for exempt household expenses can be applied when an employee is working from home due to the coronavirus.
Can we reimburse an employee’s household expenses without asking them for evidence?
Yes, but only up to certain limits.
HMRC recognises that it can often be difficult to identify and calculate the additional cost of an employee’s household expenses that are attributable to the employee working from home.
To address this problem, employers have, for several years, been able to make a maximum tax and NIC free flat-rate payment of £4 per week to employees to cover their household expenses, without the employee or the employer having to justify that amount or any additional expenditure.
With effect from 6 April 2020 the government increased the maximum flat rate payment which can be made to £6 per week or £26 per month for monthly paid employees.
The employee’s home must be a workplace and they must be working from home under a homeworking arrangement for these amounts to be paid tax and NIC free. Furthermore the rates are not exempt where they are paid in conjunction with an optional remuneration arrangement (such as under salary sacrifice). As highlighted above, HMRC have confirmed that these rates can be paid tax and NIC free when an employee is working from home due to the coronavirus.
How should we deal with any expenses or benefits which do not qualify for an exemption?
Where an employer provides an employee with homeworking expenses or benefits which do not qualify for an exemption, and cannot be provided tax and NIC free, the expenses/benefits arising should be dealt with in the appropriate way. For example subjected to tax and NIC under PAYE or reported on the employee’s form P11D.
Another option for employers is to deal with such expenses and benefits via a PAYE Settlement Agreement (or ’PSA‘). A PSA allows employers to settle tax and NIC on a grossed-up basis on behalf of its employees for eligible expenses and benefits, subject to HMRC agreement. A PSA should, therefore, only be used where the employer does not want the employee to pay tax and (where applicable) employee’s NIC on the item. HMRC has recently confirmed that employers will be able to deal with chargeable homeworking expenses and benefits linked to the coronavirus under a PSA if they wish to.
Please note that formal HMRC agreement to a PSA covering expenses and benefits relating to the tax year 2019/20 should normally be obtained in writing from HMRC by 6 July 2020 at the latest. For further details on PSAs, please see our previous PSA article.
How RSM can help
We can assist and support you in several ways, including (but not limited to):
- assessing and advising on the tax and NIC treatment of homeworking expenses and benefits;
- drafting and reviewing policies to facilitate and support the use of an exemption;
- drafting and reviewing formal homeworking agreements;
- assisting with the reporting obligations for taxable expenses and benefits, including seeking HMRC agreement to deal with taxable items via a PSA; and
- assisting with and advising on any non-tax related considerations and obligations. Please see our separate article on the other considerations of homeworking.