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Employee subscriptions to broadband: Re-think complicates tax claims

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6th Aug 2007
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Recent changes affecting how employees may claim a deduction for broadband subscriptions in HMRC’s Employment Income Manual will take some chewing over, says Accountingweb Tax Editor, Nichola Ross Martin, and unless you happen to have an old copy of the relevant pages you might have a bit of bother working out what is what in any case. When you do comprehend the changes you may be somewhat bememused to find that they make matters even more complicated, all in all, something of a nightmare for employers.

EIM21617 says that when an employer reimburses employee for the cost of subscriptions to an ISP for internet access to his or her home, s 316 ITEPA 2003– “Exemption for accommodation, supplies and services used in employment duties” does not apply, as “the employer is not providing a benefit”.

The manual then used to continue as follows: “Reimbursements are taxable as expenses payments. If the employee can show that some or all of the Internet costs related to use wholly, exclusively and necessarily in the performance of his duties, he may be entitled to a deduction under Section 336 ITEPA 2003”
That paragraph actually meant that deduction is neigh on impossible as s 336 contains the words “wholly, necessarily and exclusively”.

Revised wording
The amended guidance now says:

“But where a payment is made by an employer to reimburse an employee for reasonable additional costs (EIM01476) incurred whilst working at home under homeworking arrangements (EIM01472), the payments may be exempt under Section 316A ITEPA.

“Reasonable additional costs” would include a broadband subscription if an employee who had not previously subscribed for broadband needed to do so in order to work from home. Payments to an employee who was already subscribing for broadband, and for whom the cost was therefore not “additional” will not qualify for exemption under Section 316A.”

Practically, what does this actually mean?
If an employee has an ISP contract already in place, there will, by default be no additional costs if he or she then works from home from time to time (the rationale is that unlike a dial-up connection, broadband is always on, and so employment duties will not increase the cost to the employee).

If an employee has not got a contract in place and so has to set one up in order to perform home working duties, then, having agreed a rate of reimbursement with the employer, the employee may now be reimbursed by the employer without a benefits in kind charge. This is done by agreeing what is in essence an employee/employer personal fixed flat rate scheme between the two (see EIM01472). The onus is on both to agree a rate which covers the employee's extra costs, and this will take into consideration any extra costs incurred by the employee, one of which may now be broadband.

Employees who have homeworking arrangements have a strange system now, they are effectively able via s 316A to claim a fixed flat rate deduction via their employers, instead of having a flat rate deduction given via their PAYE code as they might for some certain other expenses.

Fixed Flat Rates
Conventional Fixed Flat Rate expense deductions (which seem to be generally for manual trades and feature cloth washing costs and tools etc) are currently under review. These fixed rates are on a list which has evolved over the years due to lobbying by trades unions, and it is up for review. HMRC have the opportunity to update the list of expenses that modern employees incur on a day to day basis and above all greatly simplify red tape for employers. They could, for instance include a broadband allowance on the list of fixed deductions instead of making employers and employees try and understand s 316A.

The s 316A system outlined above appears somewhat bizare, discriminating against those who have already installed broadband, but still being advantageous to the employee who moves house. He will be able to make a new claim on the basis of a new contract, and those who do not move house, but move jobs will not! This does assume that employee and employers can even understand the basic relief available!

Alternatively, £2 per week allowance which is an alternative under s 316A could be raised to more realistically reflect the costs like broadband and extra energy costs. This would achieves all the above without the administration cost; the current system just gives the employer the full compliance headache.

Whilst it may be more efficient for HMRC at the moment to try and offload as many costs as possible in order to hit its own efficiency targets, shuffling compliance problems around cannot be a good long term strategy. Simplification should apply across the board.

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By User deleted
08th Aug 2007 12:34

What if....
the employee already has a broadband subscription and then cancel it (thereby there is no ISP contract in place). You then require broadband for home working and your employer reimburses the employee for the ISP subscription.

Am i correct in thnking that the ISP reimbursement made this way would not be considered to be a BIK?

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