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Under the provisions of Section 316A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), no income tax liability arises on payments made to employees for reasonable additional household expenses incurred when an employee regularly performs some or all of the duties of the employment at home under an arrangement with the employer.
In order to minimise the need for record-keeping to justify the nature of the payments, HMRC accepts that payments that do not exceed the (non-statutory) amount of £;2 per week (£;104 per year) enjoy automatic exemption. Otherwise, employers must be able to provide supporting evidence that the payments do no more than cover the additional household expenses.
In HMRC's latest Tax Bulletin, a detailed article explains the basis on which employees will be able to claim tax relief where they incur additional household expenses because they work at home but the employer does not make any reimbursement, or only makes partial reimbursement.
Tax relief is only available for expenses that an employee is obliged to incur and pay wholly, exclusively and necessarily in the performance of the duties of the employment. (Section 336 of ITEPA). Until now, HMRC have applied that rule by setting two (non-statutory) tests, namely
- that the duties that the employee performs at home are substantive duties of the employment, and
- that there is an objective requirement that those duties should be carried out at the employee's home and nowhere else.
As those tests were derived from case law in the context of home-to-work travel, HMRC now takes the view that the Commissioners and the courts would likely take a different approach with regard to household expenses. In future, therefore, all of the following four conditions must be met:
- the duties that the employee performs at home are substantive duties of the employment. "Substantive duties" are duties that an employee has to carry out and that represent all or part of the central duties of the employment (this condition is unchanged),
- those duties cannot be performed without the use of appropriate facilities,
- no such appropriate facilities are available to the employee on the employer's premises (or the nature of the job requires the employee to live so far from the employer's premises that it is unreasonable to expect him or her to travel to those premises on a daily basis),
- at no time either before or after the contract is drawn up is the employee able to choose between working at the employer's premises or elsewhere.
As expenses must be incurred "wholly and exclusively" "in the performance of" the employee's duties, relief will only, in practice be allowed for:
- the additional unit costs of gas and electricity consumed while a room is being used for work,
- the metered cost of water used "in the performance of the duties" (if any),
- the unit costs of business telephone calls (including "dial up" Internet access).
The following expenses are incurred mainly for the employee's domestic purposes and therefore do not qualify for relief. In each case, the expense is a single indivisible sum (or a series of indivisible sums) no part of which is incurred "wholly and exclusively" in the performance of the employee's duties:
- council tax/rates
- rent
- water rates
- mortgage repayments/endowment premiums
- household insurance premiums.
To match the approach taken with household expenses that are reimbursed by employers, HMRC will accept that, if the conditions for relief are met, employees are entitled to a deduction of £;2 (exclusive of the cost of business telephone calls) for each week that they are required to work at home, without having to justify that figure. Employees who wish to deduct more than £;2 per week will be expected to keep records and to be able to show how their figure has been calculated. If any exempt homeworking payments have been made by the employer under the provisions of Section 316A, they must be deducted from any amounts on which the employee seeks relief under Section 336.
The Tax Bulletin article includes numerous examples of how these new conditions will be applied, for example:
- A is an area sales manager who lives in Glasgow. He manages his company's sales team in Scotland. The company's nearest office is in Newcastle, and A therefore carries out all his administrative work at home where he has set aside a room as an office. A is entitled to relief for the additional costs which he incurs as a result of working at home. The nature of his job requires him to live in Scotland, where no employer-provided office facilities are available.
- B works for the same company as A. He is the company's sales manager for the North East of England. The company would be happy for him to work from its offices in Newcastle, but they have agreed that B can work from his home in Durham, where he has set aside a room as an office. B is not entitled to a deduction for his homeworking expenses because he is working at home by choice.
- C works at his company's offices in Leeds. His home is in Kings Lynn and he spends the week in Leeds, travelling home at weekends. His employer then introduces a homeworking policy under which those employees who wish to do so can work from home. C accepts the offer and thereafter works from his home in Kings Lynn, where he sets aside a room for use as an office. He is not entitled to a deduction for homeworking expenses because he is working at home by choice.
- A company employs a team of sales people whose job is to follow up sales leads by telephone. The company trades from two small offices which house the director, her secretary and two clerical staff. There is no room for the sales team, who are recruited specifically on the basis that they will work from home. The members of the sales team are entitled to a deduction for the additional costs which they incur by working at home.
...back to 27 October 2005
Sources:
Tax Bulletin 79 |
For Payroll and Human Resource Professionals
