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Working from home: Deductions for employees Part 2. By Nichola Ross Martin

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21st Apr 2008
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This is part 2 in a series of 3 articles covering deductions for tax for home working employees.

Background
The method in which an employee may obtain tax relief for any additional costs incurred when working from home depends largely on whether home is a main workplace and the employer’s policy on reimbursing expenses

Normally, any payment made by an employer to an employee will be classed as earnings unless specifically exempted in the Income Tax (Earnings and Pensions) Act (ITEPA) 2003. S 316A contains one such exemption; it allows employees who work from home to reclaim the additional costs of homeworking from their employers free of tax and NI, as I explained last week.

Not all employers reimburse their employees’ expenses in full, and so employees may be left out of pocket (or feel out of pocket!). An employee may then try to make a claim to HMRC for a deduction against his taxable earnings for their home working expenses. The rules governing any such tax deduction are particularly tough, and a deduction will only be successful in very limited circumstances. I will now look at these to see when a home working claim may be made against employment income.

The general rule on expenses
An employee wanting claim a deduction against their earnings for tax purposes, which is not specifically exempted elsewhere in ITEPA 2003 has to follow the strict general rule s 336 ITEPA 2003.This says that a deduction from earnings is allowed for an amount if:
(a) the employee is obliged to incur and pay it as holder of the employment, and
(b) the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment

This section severely curtails claims for working from home; the employee’s home has to be a workplace. Once a home is a workplace though, an employee’s travel to and from the workplace will also be allowed for tax (s 337). Travelling and claims for other expenses are outside the scope of this article.

Checking that home is a workplace
HMRC use a set of tests to determine if home is a workplace for tax purposes:

  • 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 which are all or part of the central duties of the employment
    duties which are preparatory to employment (i.e. background reading for a school teacher or journalist) are not regarded as substantive.
  • the substantive 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 employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

Certain employments have their homeworking already agreed by HMRC, further details can be found in HMRC’s Employment Income Manual (EIM) at the following paragraphs:
• university lecturers, see EIM70713 (but see EIM70735 for school teachers)
• councillors, see EIM65930
• examiners, see EIM62920
• ministers of religion, see EIM60040
• midwives, see EIM66400.

What other sort of employees can claim a direct deduction against tax?
In EIM 32790 HMRC provides some examples I have taken the main ones and analysed them as follows:

Example – substantive duties
A member of an NHS trust board attends meetings of the board in Exeter. She has no office facilities available to her in Exeter to prepare for meetings. She receives papers from the NHS trust at her home in Salcombe and reads the papers at home. This takes several hours and she would not be able to take a full part in meetings if she did not do this work at home. She requests a deduction for the cost of travel between her home and her permanent workplace in Exeter.

Analysis: HMRC says that home is not the workplace and so no deduction for travel will be allowed. The preparatory work (reading for the meeting) done at home is not part of the duties of the office or employment – this view is based on past case law, which is very strict; s 336 does say that expenditure must be incurred in performance of duties, not in preparation, after all. I note that Board members are entitled by some trusts to claim limited expenses; in this example this might include the additional costs of homeworking. If that were the case s 316 applies and the board member would suffer no additional tax or NI.

Example – nature of duties requires employee to live at a distance from employer’s premises
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.

AnalysisHMRC confirm that 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 there are no employer-provided office facilities and administrative work performed at home is part of the substantive duties of his employment. A’s employer could reimburse him in full for all his homeworking expenses instead (s 316), A would then not be able to claim the same expenses against his income under s 336).

Example – employee working at home by choice
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.

AnalysisB is not entitled to a deduction for his homeworking expenses for tax against his employment income because he works at home by choice (no obligation for s 336 purposes). B could though have his home working expenses reimbursed tax and NI free by his employer, if he agreed to do so instead using the benefits of s 316 and s 316A – see last week’s article for more detail

Example - nature of duties requires employee to live at a distance from employer’s premises
The company which employs A and B decides to close its regional offices and to operate solely from its head office in London. B is still the area sales manager for the North East of England and he continues to work from his home in Durham. The work that he does at home is part of the substantive duties of his employment. Following the closure of the Newcastle office he has no practical alternative but to provide himself with office facilities at his own expense.

AnalysisB is now entitled to relief for the additional costs which he incurs as a result of working at home – he would make such a claim via his tax return, or in writing to HMRC (s 336). Alternatively, the employer could reimburse part or all of the expenses incurred by both employees directly (s 316 & s 316A), which would save them from making their own direct claims for tax. This would give the employer the cashflow disadvantage, instead of employee, he also has the administration disadvantage in terms of checking expense claims. If the employer only reimbursed part of their expenses, the employees could make a claim on their tax returns for the balance to be deducted against their earned income.

Example – contract reflecting employee’s personal choice
D lives in Gloucester and applies for a job with a company whose offices are in Birmingham. The company are happy to pay his expenses of moving from Gloucester to somewhere on the outskirts of Birmingham. However D does not want to disrupt his childrens’ schooling, or to commute between Gloucester and Birmingham, so he asks the company if he can work from home. The company agrees, and D’s employment contract says that he will be home based. He sets aside a room for use as an office.

Analysis: D is not entitled to a deduction for homeworking expenses because he is working at home by choice. The contractual term requiring him to work at home is simply an expression of his personal choice. Alternatively, D’s employer could reimburse him for the additional costs of homeworking (per s 316/316A – again, see last week.)

Example – no appropriate facilities at employer’s premises
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.

Analysis:The members of the sales team are entitled to a deduction for the additional costs which they incur by working at home under s 336, as they are obliged to incur the additional costs. Alternatively, the employer could reimburse him for the additional costs of homeworking (per s 316/316A – again, see last week.)

Example: – appropriate facilities available at employer’s premises
F is a teacher at a secondary school. During term time she regularly takes work such as marking exercises home to complete in the evenings and at weekends. However she has free periods during the school day and the school has rooms available where she can mark papers if she wishes to do so.

Analysis F is not entitled to a deduction for the expenses of working at home because appropriate facilities are available on her employer’s premises. It is not an objective requirement of her job that she should perform any of her duties at home.

A note on owner-managers
Director/shareholders who control and chose to base their own companies from home will be in a different position to normal employees. This type of owner-manager will not normally make a claim under s 336 as his company will reimburse all homeworking expenses directly (s 316 or 316A). The major exceptions to this “rule” is when IR35 applies to engagements, and I am going to look at the position for personal service company workers and owner-managers in the next article in this series.

What sort of expenses might an employee be able to claim under s 336?
The type of expenses are the same as for employees who work at home by choice:

  • Extra metered costs of light and heat
  • Business rates - if charged, not council tax
  • Internet access - providing not already in place
  • Insurance - if additional insurance is taken out
  • Telephone calls (not line rental)
  • Cleaning - if extra cleaning is required
  • Metered water

A homeworking employee cannot reclaim mortgage interest, rent, council tax, standing water charges or line rentals. No claims are permitted where there is a dual private benefit or use, and this rules out expenses such as general repairs and decorating costs. Tax relief will be given on a dedicated business items for instance a business telephone line or internet access.

Conclusion
An employee will make a claim under s 336 to HMRC for tax relief for home working expenses when these are incurred because home is their workplace and their employer does not otherwise reimburse the costs. No claim is possible when the workplace could be elsewhere or an alternative is provided by the employer.

Nichola Ross Martin is a director of www.rossmartin.co.uk a virtual tax advisory and training service for accountants and their clients. She can be contacted by email.

Links
Working from home for the self-employed

Working from home: Deductions for employees Part 1.

AccountingWEB.co.uk working from home
seminars

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Replies (4)

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By User deleted
29th Apr 2008 09:14

too much fuss for nothing!
Too little given by taxman in terms of homeworking, not worth the bother I am afraid. Time spent on thinking about this might not be worth the tax benefit for most cases.

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By User deleted
24th Apr 2008 09:12

Hi Mark
First off, sorry to hear that you are not well, but nice to hear that your employer is willing to accommodate your condition.

Second off, these rules are not new - HMRC has just enlarged its guidance to give some more examples.

If your employer pays your extra costs of homeworking - i.e. reimburses your additional costs, then s 316A kicks in and you are allowed to receive the reimbursement with no tax or NI effect.

What if your employer does not pay the additional costs? Well, then you claim under s 336 - which is what the above article is about. HMRC may take the view that it is your illness that requires you to work from home, not your job and try and disallow the your expenses so you will give no tax relief on them.

It may be though, that your employer does not have the facilities available to allow you to work at their premises and so homeworking is the only way of performing your obligations. It depends on your needs and this where say a lack of facilities for the disabled (for example) may have a direct bearing.

I need more information of your condition etc to advise further.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk

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By User deleted
22nd Apr 2008 16:10

No rent or mortgage interest
An employee cannot claim rent (or mortgage interest) in whole or a proportion of, because of duality of purpose. The "wholly, exclusively and necessarily in the performance of the duties of the employment" rule (s 336) gets in the way.

But, if an employee with a homeworking requirement (i.e. has to work from home as no other workplace is available, and meets HMRC's tests) rented a premises with, say, an extra room to use exclusively for work, and the period of rental commenced when the obligation to set up an office at home commenced, then I would suggest that a claim would be possible.

If the employee happened to have a spare room and then chanced upon an obligation to work from home, it may be a different matter. The rent would have been due whatever the home working arrangement and so duality creeps in.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk


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By User deleted
22nd Apr 2008 14:52

is rent eligible?
if the employee pays rent and uses his home for the employer's business (by choice or not), is rent one of the eligible expenses he can claim under s316 or be reimbursed free of tax & NI? (potentially this is a large claim compared to the other home expenses and as such I wouldn't be surprised if the taxman has closed it down).

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