Nunn Hayward - November 2007

Abacus November 2007

Working from Home – Employees this time

In last month’s edition of Abacus, we brought to readers’ attention the guidance that HMRC recently published in its Business Income Manual in respect of the deductibility of expenses incurred by self employed people who work from home. In this article, we will therefore turn our attention to the deductibility of household expenses for employees who work from home.

There are two possible scenarios with regard to employees’ expenses. These are:

The employee pays for the expense, is not reimbursed by his employer and seeks a deduction against his taxable employment income; or
The employee pays for the expense and receives a tax-free reimbursement from his employer.

Scenario 1: Initial hurdle where employee is not reimbursed

Most readers will be aware of the rule that, in order for an expense to be deductible against employment income, it must be ‘incurred wholly, exclusively and necessarily in the performance of the duties of the employment’.

In interpreting this rule in relation to homeworking, HMRC states that employees who work at home are only entitled to a deduction for their additional household expenses where all of the following conditions apply:

the duties that the employee performs at home are substantive duties of the employment.
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.
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.

These restrictions are obviously very onerous and it is fair to say the chances are you will not be entitled to any tax deduction from your earnings.

Scenario 2: Initial hurdle where employee is reimbursed

With regard to employees who are reimbursed for their household expenses, this initial hurdle is much smaller. The employee merely needs to work at home regularly under a ‘homeworking arrangement’ agreed with the employer in order for any household expenses to be allowable. However, if an employee works at home, informally or irregularly and not by arrangement with the employer, then no household expenses will be allowable.

Over the hurdles? If so, which household expenses are deductible?

Unfortunately the guidance here is nowhere near as detailed as for self-employed individuals. But we will pass on what little guidance there is, assuming we are only looking at reimbursed expenses.

As for self-employed individuals, it appears from the examples HMRC give in its notes that part of the home does not need to be specifically set aside for working at home in order for any household expenses to be allowable.
However, it would be prudent to treat household expenses incurred by employees as allowable only where part of the home is used exclusively for work when work is being undertaken at home.
Unlike the situation for self-employed persons, fixed costs (those that do not vary according to business use) are categorically not allowable. HMRC specifies the following as not being allowable
- Council tax/rates
- Rent
- Water rates (other than on a meter)
- Mortgage interest and endowment premium
- Household insurance premiums
The employer may reimburse the additional expenses ‘connected with the day to day running of the employee’s home. This might include 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 or telephone use. In some cases work at home may lead to an increase in household content insurance or to a liability for business rates’.

No guidance is given for employees, despite HMRC acknowledging that ‘it may be difficult for employees to calculate the exact amount of the additional costs that they have incurred as a result of working at home’.
HMRC states in its guidance that a flat rate deduction of Ł2 is allowable each week that the employee is required to work at home. Where tax relief is claimed on this amount, the employer or employee will not be required to justify it.

Where the company reimburses the employee’s expenses, this rate applies where the employee works ‘regularly’ at home. Unfortunately, ‘regularly’ is not defined by HMRC (It is also unclear whether or not this covers business telephone calls, but considering the level, it probably does not.) The employer can agree a higher rate in advance with the Inspector of Taxes, provided this reflects the employee’s higher costs and the employer can provide evidence to justify the increase. This higher amount can then be paid tax free. (HMRC states that it could be agreed to rise each year in line with inflation.)

How is relief claimed?

Where an employee is reimbursed…

The total amount which the employer reimburses needs to be reported in section N of the employee’s form P11D. There is a separate field for home telephone related expenses, but a single figure for all other household expense payments (and any other expenses) needs to be entered, albeit with a description of the various expenses.
The employee then needs to include only the taxable household expenses in his tax return, in box 1.23 of the Employment pages (of 2006/07.)

Conclusion

So, that is all the guidance we have been given for employees. When considering whether an employee’s homeworking expenses are allowable:

First establish whether any such expenses will be allowable. The test here is much stricter for employees whose household expenses are not reimbursed than for those whose expenses are reimbursed.
- If the employee is not reimbursed for his household expenses and is seeking a deduction against his employment income it is unlikely a claim can be made.
- If the employee is reimbursed by his employer then consider whether the employee works at home ‘under homeworking arrangements’, i.e. he regularly works at home (not sporadically) under homeworking arrangements agreed with his employer.
- Next, consider which household expenses are allowable and which are not following the ‘rules’ explained in this article.
- As little guidance is provided on apportioning running expenses where these relate partly to work use and partly to private use, the easiest thing to do would be to obtain tax relief for reimbursed expenses at a flat rate of Ł2 per week plus relief for your business calls and internet use. If you believe this will leave you substantially out of pocket, then you might want to consider claiming a figure that is higher than Ł2 a week. Or you might want to consider apportioning your actual running expenses, but it will be up to you to decide how. Be careful though, as HMRC may challenge the basis on which the allowable expenses are calculated, requiring detailed records.

If you have any issues raised by this article please contact Steve Cook, Tax Partner, steve@nunn-hayward.com or call 01753 888211.

STOP PRESS

Second Amnesty Likely Following Estimated Ł500m from First Amnesty

Taxpayers with undisclosed offshore accounts are set to be offered a second chance to come clean about their undeclared liabilities under a new offshore disclosure scheme.

HMRC director General Dave Hartnett revealed the move in a televised interview today.

HMRC is looking to obtain account details from 175 banks and other financial institutions in a bid to widen the net it cast with the UK’s top five banks with the first amnesty.

We will keep you posted with any official pronouncements as they arise.

If you have any queries or issues regarding this article contact Steve Cook, Tax Partner, steve@nunn-hayward.com or call 01753 888211.

Important Tax Dates

30th December 2007		Tax Returns filed via the Internet Service for Self Assessment must be filed by this date if the Revenue is to do the calculations or collect underpayments up to Ł2,000 through 2008/09 PAYE codes.

31 January 2008		- Filing deadline for Personal Tax returns for the tax year 2006/07.

		- Payment date for 2006/07 Personal Tax and 1st payment on account of 2007/08.

Please contact us to discuss the above further

Tel: 01753 888211 Fax: 01753 889669
Email: abacus@nunn-hayward.com
Nunn Hayward, Sterling House, 20 Station Road, Gerrards Cross, Bucks SL9 8EL.

Chartered Accountants, Registered Auditors and Insolvency Practitioners. This publication has been prepared as a guide only to topics of current financial and business interest. It is not intended to be a substitute for professional advice. No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by either the authors or Nunn Hayward. All rights reserved.

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