Over recent years, it has become increasingly popular for employers to allow their employees to work from home, and in doing so, pay an amount to cover any additional household costs incurred. What are the tax implications of such expenses for the employee?
Broadly, no tax liability will arise where an employer makes a payment to an employee for reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home under ‘homeworking arrangements’.
‘Homeworking arrangements’ are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. There is no requirement for any part of the employee’s home to be used exclusively for the purposes of the employment – in fact, if any part of the home is used exclusively for work, problems could arise on the future sale of the house as part of the capital gains tax exemption on private residences may be lost.
HMRC have stated that they will accept that homeworking arrangements exist where:
- There are arrangements between the employer and the employee; and
- The employee works at home regularly under those arrangements.
The HMRC guidance also advises that:
‘The arrangements need not be in writing but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings. It applies where an employee works at home by arrangement with the employer instead of working on the employer’s premises.’
HMRC accept that the ‘regularly’ condition is met if working at home is frequent or follows a pattern. The fact that the days spent at home vary from week to week is not a bar to claiming the exemption.
‘Household expenses’ are defined as expenses connected with the day-to-day running of the employee’s home. The exemption applies to additional household expenses, and HMRC have given the following guidance:
‘Typically this will include the additional costs of heating and lighting the work area or the metered cost of increased water use. There might also be increased charges for Internet access, home contents insurance, or business telephone calls. Where working at home leads to a liability for business rates the additional cost incurred can also be included.
The additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example, mortgage interest, rent, council tax, or water rates. It also excludes expenses that put the employee into a position to work at home, for example, building alterations or the cost of furniture or office equipment.
Amount of Exemption
To minimize the need for record-keeping, employers can pay up to £4 per week (£208 per year) without supporting evidence of the costs the employee has incurred. If an employer pays more than that amount, the exemption will still be available but the employer must provide supporting evidence that the payment is wholly in respect of additional household expenses incurred by the employee in carrying out his duties at home.
If an employer wishes to pay more than the guideline rate per week tax-free, then it is recommended that the employer should agree in advance with HMRC a scale rate. Failing that, records will need to be kept of the actual additional costs incurred by each employee.