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Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP outlines some practical issues for employees wishing to claim tax relief for the additional household expenses of working from home.Tax relief claims for the additional household expenses of employees who work from home are often a cause of some uncertainty for clients and practitioners alike. HM Revenue & Customs (HMRC) introduced some guidance on the subject in Tax Bulletin 79 (October 2005). Part of the article represents a change of view by HMRC, and supersedes the guidance in the Employment Income Manual at EIM32760 onwards, which will be rewritten.

Tax Buletin 79

It is worth noting that the following limitations apply to the guidance in Tax Bulletin 79 (all references are to ITEPA 2003, unless otherwise stated):

• The Tax Bulletin article deals with tax relief claims for an employee’s expenses that are not reimbursed by the employer under s 336 (i.e. under the ‘wholly, exclusively and necessarily’ rule).

• This deduction from employment income is not to be confused with the allowance that employers can pay without tax or National Insurance to employees working from home under homeworking arrangements under s 316A. The tax treatment of payments by employers for the additional household expenses of employees under homeworking arrangements remains unchanged;

• The tests and guidance apply to employees only. Self-employed individuals are required to satisfy less stringent tests to obtain a deduction for the costs of working from home (see the Business Income Manual at BIM37600 and BIM46840);

• The guidance in Tax Bulletin 79 (and the Employment Income Manual) is non-statutory, and is therefore open to challenge in appropriate cases.

Conditions for claiming relief

Tax Bulletin 79 sets out four tests to be applied in determining whether a deduction is due for homeworking expenses, all of which must be satisfied.

1. The employee’s work at home represents ‘substantive duties’ (i.e. necessary duties that are a central part of the employment);

2. Those duties cannot be performed without appropriate facilities;

3. No such facilities are available on the employer’s premises (or the employee’s job requires him to live too far away to reasonably commute to those premises each day); and

4. The employee has no choice over where to work.

HMRC consider that the last two conditions will be the most problematic in practice, and Tax Bulletin 79 therefore includes various examples illustrating when the conditions will and will not be satisfied.

Eligible expenses

The types of expenses eligible for relief are fairly limited, and should be capable of being measured reasonably accurately in respect of the work area of the house. Tax Bulletin 79 indicates that it is the unit cost of additional heating, lighting and business telephone calls, and the metered cost of additional water that should be used as the basis for claims. In practice, it will difficult, if not impossible, to gauge these additional costs. HMRC will therefore accept deductions of £2 per week (excluding costs of business telephone calls) without the employee having to keep records or calculations of the claim. Above that level, records and computations will need to be maintained.

A similar approach is adopted by HMRC when employees are in receipt of payments by the employer for homeworker’s additional household expenses (within s 316A). Employees who claim tax relief for homeworking expenses under s 336 must deduct payments by the employer under s 316A. For example, if an employee satisfying the tests in s 336 claims additional household expenses of £5 per week, but receives only £2 per week towards those expenses from the employer (i.e. the limit that HMRC will accept without having to justify the amount paid – see EIM01476), the deduction under s 336 is £3 per week.

Expenses such as the mortgage and water rates do not qualify for relief. In addition, Tax Bulletin 79 indicates two new relief restrictions, which represent a ‘change of practice’ from the guidance given in the Employment Income Manual at the time:

• Council tax/rates – EIM32815 states: ‘A room set aside exclusively for business contributes to the value of the house. Therefore a deduction can be given for a proportion of Council Tax, or the rates in Northern Ireland…’

• Rent – EIM32815 states: ‘If the property is rented the amount of rent reflects the existence of the room that is used exclusively for business. Therefore a deduction can be permitted for a proportion of the rent paid.’

No reason is given for HMRC’s change in policy on tax relief for these items. However, the employee must broadly be obliged to incur them, and in the case of ‘indivisible sums’ (such as the above items) all or part of them must be wholly and exclusively incurred in the performance of his or her employment duties.

In the case of ‘one man’ or owner-managed companies operating from home, practitioners may be considering advising those clients to rent or license workspace to the company on a commercial basis under a formal agreement. This arrangement will have different tax (and other) implications, which are outside the scope of this article. However, the property income legislation generally applies the trading income rules for expenses (ITTOIA 2005, s 272), which as mentioned above are normally less difficult to satisfy then for employment income purposes.

December 2005

Mark McLaughlin CTA (Fellow) ATT TEP

The above article is adapted from ‘Busy Practitioner’ (December 2005), a monthly publication from Tottel Publishing.