Hybrid working – the employment tax considerations

The coronavirus pandemic has accelerated a move towards hybrid working, which allows employees to split their time between traditional workplaces like offices and working remotely (usually from home).

With many office-based employees now expecting to be able to work from home for at least part of the time, employers need to ensure that they have a comprehensive and up to date hybrid working policy. From an employment tax perspective, the policy needs to address issues in relation to:

• permanent workplaces and travel expenses;
• provision of home office equipment; and 
• payment of expenses.

As employers start to formulate their new policies it is also important to consider the wider implications of hybrid working. There could be, for example, employment law considerations and a range of HR procedural matters to think about. Employee welfare and changes to line manager responsibilities will need to be near the top of the list.

It is also necessary to think about threats to IT security where employees are working remotely, particularly in certain overseas jurisdictions, as well as the impact of hybrid working on the demand for office space. Some of the wider considerations are covered in our recent webinar and on our hybrid working factsheet.

Permanent workplaces and travel expenses

Broadly speaking, a permanent workplace is a place that an employee attends regularly to perform their duties. Their attendance is frequent and follows a pattern.

One of the key considerations when moving to a hybrid working arrangement is whether it will result in a change to an employee’s permanent workplace, as this will affect the tax position on employee travel expense claims.

Crucially, in relation to hybrid working, HMRC makes the point that in many cases home working is a personal choice. While a home may also be a place of work, it may not necessarily be a permanent workplace for tax purposes.

If the employee still has to be in an office for part of the week, then the office is likely to remain as their permanent workplace. In this situation, unless their home is also accepted as a workplace (which is unlikely), their travel into the office each week is regarded as a normal commute. Where employers reimburse these home-to-office commuting expenses, the expenses will be taxable and liable to NIC.

This is, however, a complex area and the circumstances may differ for different groups of employees. If there is no longer an office hub, for example, and employees have no choice but to work from home then it could be said that their homes are truly ‘permanent workplaces.’ Travel from those homes to other workplaces may therefore be treated as business travel. 

Whatever the circumstances, it is important to reassess your position as a result of a move to hybrid working. Update your expense policy and, where necessary, your employment contracts to reflect any changes.

Provision of home office equipment

The requirement to work from home under coronavirus restrictions required employers to move quickly to provide equipment to employees who were working remotely.

Where an employer provides an employee with home office equipment (for example a desk or printer) for the sole purpose of enabling the employee to work, and any private use of that equipment is insignificant, the provision of the equipment should be exempt from tax and NIC.

This exemption is conditional on the employer retaining ownership of the equipment. A tax liability may arise if ownership of the equipment passes to the employee, so care needs to be taken when the old equipment is updated or replaced.

As part of coronavirus support measures, the government announced that from March 2020 a temporary tax and NIC exemption applied to ensure that no tax liability arose where employers reimbursed employees for personal spending on home office equipment. This temporary exemption was provided on two conditions:

• the employee was working from home as a result of the coronavirus outbreak, and needed the equipment to work effectively; and
• the employer’s offer of reimbursement is made available to all its employees on broadly similar terms.

While this relief was originally intended to apply for the 2020/21 tax year only, it was extended until 5 April 2022. From 6 April 2022 the position returned to as it originally was (as explained above).

Payment of expenses

Household expenses are likely to have increased for those who are working from home. Employers need to decide whether it is appropriate to contribute towards these additional costs, or whether it is reasonable to conclude that they’re balanced by the reduced costs of commuting. Once a decision has been made it needs to be clearly communicated in a policy.

Where the employee is working from home under a homeworking arrangement, and additional household costs are incurred in carrying out employment duties, the employer can either:

• reimburse the employee for actual reasonable additional household expenses; or
• pay an HMRC-agreed tax and NIC-free allowance of up to £26 per month or £6 per week.

The ‘actual costs’ exemption does not extend to fixed costs unrelated to whether the employee is home or office based (eg rent and council tax). It also excludes costs that enable the employee to work from home, like building alterations.

Many employers decide to contribute to additional household running costs by paying the tax and NIC free allowance of £26 per month. This is subject to there being a formal homeworking arrangement in place, under which the employee regularly performs some or all employment duties at home. No relief is due in situations where an employee has chosen to work from home from 6 April 2022. 

By way of example, HMRC guidance states that where an employee agrees to work three days each week on the employer’s premises and two days at home, it is accepted that they are ‘regularly’ working from home. HMRC also confirms that no apportionment of the £26 per month is required if the employee works from home for only part of the week.
It is recommended that where the employer does pay the tax and NIC-free allowance, a process is put in place to periodically assess whether the employee is still regularly performing duties from home.

Many employers have decided that they will not reimburse actual household expenses, nor pay the flat rate allowance. HMRC does, however, allow employees in that situation to make direct claims for tax relief.

Overseas matters

We frequently see cases where employees are making requests to work from home where home is outside of the UK. Due to the complexities involved, it is important that such requests are considered carefully before agreement is given.

There will be a number of additional considerations, including:

• local payroll withholding tax and social security requirements;
• the corporate tax implications of possibly creating a permanent workplace overseas; 
• Visa and data protection considerations; and
• employment law issues. 

Employee benefit provision

The move to hybrid working may result in changes to demand for some benefits-in-kind and their perceived value to employees. Employers should review their current offering and assess whether these should be amended.

For example, company cars and fuel are a costly benefit that revised working arrangements may make less attractive. Similarly, demand for workplace car parking and season ticket loans may diminish.

A collective consideration

In summary, hybrid working is undoubtedly here to stay for many of us. It is therefore important that employers determine their policy across all affected areas of the business and update their processes, procedures, and controls accordingly.

Ideally, all areas of the business will contribute to a new policy that should cover tax, legal and HR considerations. This then needs to be communicated effectively.

The RSM People Advisory Services team can help you with all aspects of implementing a successful hybrid working policy. For further information, please contact David Williams-Richardson.