In an article for What Investment UK, we explain how working from home has tax implications for you and the business you work for.
More than a third of full-time employees now work from home at least one day a week, which has tax on home working implications for all concerned.
The good news is that there is the chance for employers to ‘gift’ their staff an allowance worth up to £208 a year, or £4 a week, which is tax deductible for both parties.
This particular Fixed Rate Allowance is an unusual benefit. HMRC does not require a written contract as evidence of home working, or any proof of expenditure incurred. What they do expect, however, is that the employee is working from home on a regular basis and not just occasionally.
In my experience, despite the growth in home working, which is projected to rise significantly, there is little awareness of the allowance or of other benefits and liabilities.
Employers can, for example, can provide whatever tools-of-their-trade an employee needs to work from home, including computers. But to avoid a tax liability, you must satisfy HMRC that any private use of such items is insignificant.
This can be a grey area because HMRC scrutinises the reason for the service or equipment being provided, rather than actual usage. The distinction is important and means, for instance, that if an employee is given a laptop to use at client sites and there is little expectation it will be used for personal use then it will be exempt. It will remain so even if, in fact, the employee uses the computer regularly for personal purposes.
Employers can protect themselves from the grey areas of liability, and any actual ones, quite simply by making sure that employment contracts have a standard paragraph restricting use of company assets.
Instead of paying the £4 weekly allowance employers can reimburse the actual additional costs of working from home, such as increased utility bills.
However, the exemption only applies to expenses which are incurred “wholly, exclusively and necessarily” by the employee in the course of doing their job. It will not cover contributions to any fixed household expenses, such as mortgage interest and council tax. Neither will it cover any contributions to variable costs that are not based on the actual usage.
There is no requirement to have an agreement or regular homeworking for this exemption to apply.
But a contribution towards any fixed costs such as mortgage interest, rent or council tax will have tax implications for both the employee and employer.
hese include a risk to full Principal Private Residence Relief, which is what allows people to sell their main homes free from Capital Gains Tax. Home working claims could also trigger a liability for business rates.
Employers can also provide employees with any services that are required for them to work from home, provided that any personal use of the services in “not significant” and the contract for the services is between the employer and the supplier. An example would be the provision of a telephone line at home to be used for making business calls.
Tax implications of other payments
Any contributions from employers to employees for any item which is not exempt will be either taxable remuneration which should be processed through the payroll with employers NI contributions, or it will be a taxable benefit requiring the completing of P11Ds and payment of the associated class 1A National Insurance (NI).
Whether an item is taxable remuneration or a taxable benefit depends on the exact mechanics of the arrangement – if the contract is between the supplier and the employee any payments you make to the employee will be taxable remuneration, whereas if the contract is between the supplier and the employer it will be a taxable benefit.
The rules become more complex and the figures more significant when a director-shareholder runs a business from their home.
The rules set out above still apply. But it is unlikely that the individual is going to be happy to accept the exempt £4 a week or be willing to deal with the administrative and NI burden of preparing a P11D form for the business meeting some of the fixed costs of running the property.
The solution is for the business to formally rent part of the house because:
- the rent will be a deductible expense for the business;
- the homeowner/s will have rental income which will need to be reported on their self-assessment personal tax return/s;
- the homeowner/s can claim a proportion of their house running costs against the rental income.
If the rent is carefully calculated, the net rental income arising in the hands of the individual will be minimal and no NI will be due. This is more tax efficient than the methods outlined earlier.
How to make it work financially
There should be a formal rent agreement in place, which details the annual rent charge as a set amount – it should not state that the company will pay a percentage of the expenses.
The amount should be calculated with reference to the amount of expenses that will be allowed to be deducted from the rental income. This will minimise the income tax impact on the homeowner.
The allowable deduction will be calculated by reference to the number of rooms used in running the business versus the total number of rooms (excluding kitchens and bathrooms) in the property. It is unlikely (and inadvisable) that the rooms are used exclusively for business, and the calculation should also factor this in.
For example, imagine a 4-bedroom house with a living room, dining room, kitchen and 2 bathrooms where one of the bedrooms has been turned into a home office. The office is used to run a business during the week but by the whole family for homework, social media browsing and other personal activities in the evenings and at weekends.
The percentage of house running costs which could then be set against the rental income, and should therefore be used as the basis of the annual rental charge would be calculated this way:
1/6 x (8 x 5) / (24 x 7) = 4%
(one out of the six “living” rooms is being used for business, eight hours a day for five days a week)
There are no hard and fast rules as to the percentage of costs that can be claimed. As long as the estimate is reasonable, and can be backed up, HMRC should accept it.
But be careful. The proportion of business use may be higher than in the illustration. However, any rooms used exclusively for business will restrict the Principal Private Residence relief available to mitigate capital gains tax on a future sale of the property. It could also trigger a liability to business rates.
The rental agreement needs to be between all owners of the property and the business, and rent split between the owners. Therefore, the rental charge could purposefully be set at a higher amount than the expenses that can be claimed as a way of extracting funds from the company into the hands of a spouse who perhaps has excess tax allowances or a lower effective rate of tax.
What should be understood as working patterns change is that home working, either fully or part-time, is an area that requires judgement and calculation.
The tax consequences from tax on home working claims make it wise to think carefully before making them.