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Working from home tax checklist

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26th Jul 2012
AccountingWEB
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With gridlock predicted for the capital during the London 2012 Olympics, the pressure is on more people to work flexibly from home. Jennifer Adams presents a checklist of the main tax issues that may arise.

Whether as a result of special circumstances such as bad weather or the Olympic games, working from home regularly rears its head in AccountingWEB’s Any Answers section, particularly concerning claims for directors who use their home as an office.

Four years ago Nichola Ross-Martin wrote a series of articles on this topic that still stand the test of time; not much has changed apart from the HMRC increasing the standard weekly scale rate to £4.

A checklist of the more important points to consider follows.

General employment expenses

The rule for general employment claims, where expenses are incurred but not reimbursed, is set out in s336 of the Income Tax (Earnings and Pensions) Act 2003.

Allowed if:

  • The employee is obliged to pay and
  • The amount is incurred ‘wholly, exclusively and necessarily in the performance of the duties of employment.’ It is not enough for the expense to be just relevant to the employment, or incurred in connection with the work - it must wholly and totally relevant.

See Revenue and Customs Commissions v Decadt 2008 (thanks to Simon's Tax Cases) for further explanation and Tax Bulletin Issue 79.

Claim depends on:

  • whether working from home is compulsory (the home being designated a ‘main workplace’ because the workplace cannot be elsewhere) or voluntary by choice; and
  • the employer’s policy for claim, if there is one.

HMRC permission is required using specific tests to determine whether the set up of the workplace is compulsory. It is well known that s336 claims are nigh on impossible according to AccountingWEB members who have tried.

HMRC's tests are detailed under EIM32760 - Other expenses: home: working from home. Usually the claim falls at the first hurdle - requiring the duties of employment to be ‘substantive’ and unable to be undertaken elsewhere (ie compulsory).

If allowed - what can be claimed:

  • Metered utility costs (NOT standing charges)
  • Business rates if charged (NOT council tax)
  • Additional insurance
  • Telephone calls (NOT line rental)
  • Internet access (providing not already in place)
  • Cleaning
  • Possibly travel costs to main company premises.

No deduction for rent or mortgage although if additional borrowing incurred to finance creation of workspace interest will be allowed so long as HMRC’s original tests are passed.

How to make a claim:

  • Complete section in personal tax Return; or
  • The employer could reimburse all or most of the expenses under s 316 ITEPA 2003 (depends on company policy). If only part then the employee claims under s336 on  Return for the non reimbursed amount; or
  • Claim standard scale rate of £4 per week on tax return - no need to keep detailed costs figures.

Voluntary arrangements (eg Olympics)

If there is no obligation to work from home, s336 cannot apply and the claim needs to be under s316A ITEPA 2003 instead. This section covers additional household expenses incurred but only if reimbursed by employer under a ‘home working arrangement’, as advised in HMRC's EIM01472 - Employment income: household expenses: payments to reimburse additional costs. The agreement need not be in writing but is preferable to be so. Negotiation of amount is with employer not HMRC although ‘unreasonable’ claims can be challenged by HMRC. Payment is tax and NI free.

What can be claimed:

  • Easier to obtain relief - employee can claim for anything needed for work although NOT for workplace building/construction nor fixed costs such as council tax. Supply of furniture, computers etc are allowed and do not attract benefit in kind charge.
  • Claim is the same as listed under ‘Compulsory’ s336 claim although travel costs from home base to main company premises are not allowed.

How to make an s316 claim:

  • Submit claims to employer based on actual costs - keep receipts. A P11D form may need to be completed unless there is a dispensation in place; or
  • Claim a company estimated scale rate based on a sample of employees expenses - no need to keep receipts - claim on return; or
  • Claim standard scale rate of £4 per week  - no need to keep receipts - claim on SA return.

Directors’ licence agreement

In addition to the availability of claims under s 316 ITEPA 2003 (s336 is not relevant) the director and company can enter into a licence agreement. This is a formal agreement between the company and the director in which the company pays rent for the non-exclusive use of an office in the director's home. Providing the property is used by the company for its business, the rent paid is an expense of the company.

Any Answers queries

  • The rental income is declared on the director’s personal tax return with a proportion of the household expenses offset. AccountingWEB member DRMJOB advised using a proper rental agreement that confirms the situation as ..."in receipt of rent so can claim as a deduction any expenditure that is wholly and exclusively incurred in providing the facility to the company. If there is a legitimate property profit then that is taxed as normal but outside PAYE and NIC systems. This is a much better scenario than trying to get an employee status expense deduction. Previous experience is that HMRC does not dispute this set up if expenses are reasonable."
  • Remember: Rent a room relief is not relevant where a room is rented to a business.
  • Business rates and CGT on a home office: Cfield advised last month of a good article on the VOA (Valuation Office) website on this subject. In a nutshell, you should be exempt provided that
    a) the room is not exclusively used for business; and
    b) the room was not built or specially adapted for the business... This also goes for CGT. Make sure the room has some domestic use’
  • Check that the use of home for business purposes is not contrary to any mortgage agreement - another reason for non exclusive business use.

How to calculate claim

A free spreadsheet calculator is available from AccountingWEB member Mark Telford that can be adjusted for self employed or employed use.

Further reading

Jennifer Adams FCIS TEP ATT is a freelance writer and author specialising in tax and company secretarial issues, and can be contacted at Abacus Business Solutions.

Replies (13)

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By frauke
30th Jul 2012 11:35

London Empty

Its amazing.  I had to go to Stratford on Friday afternoon to attend the opening a festival going on for 17 days (less than a mile from the Olympic village), and apart from the closure of the Maryland Station, travelling was easy and not at all crowded!  The roads were so empty, that I decided to drive up from Hampshire on Saturday and again on Sunday (Sunday the London was like a ghost town).  I going to drive up again this afternoon and attend for another day. Its wonderful. I normally would never consider driving in London, but no-one seems to be travelling in London at the moment. I have never seen the roads this empty.

 

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By The Minion
30th Jul 2012 11:21

I too drove to London on Friday

but spent the best part of seven hours on the motorways (a significant prt of which was on the M25).

I woudl hazard a guess that London is so quiet because Seb Coe is coralling all the motorists on the M25 until he finds somewhere to put them.

Thanks (1)
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By Primeman
30th Jul 2012 11:48

Telephone/Broadband packages

I am confused as to whether an Employee that has a bundled Telephone and Broadband package provided primarily for work purposes needs to put an allowance on the P11D for private phone usage.

Does anyone have any experience of these

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By philfromleeds
30th Jul 2012 11:49

Putting on the greatest loss making show on earth

 

I feel that Danny Boyle did us proud. He and the athletes and also the lottery players are the hero's. We have now got the facilities to do the European Championships and the Commonwealth Games and even the Olympics again but I wish we never got involved in the first place.

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Replying to FirstTab:
By Steve-EBL
30th Jul 2012 12:09

Why wish?

philfromleeds wrote:

 

I feel that Danny Boyle did us proud. He and the athletes and also the lottery players are the hero's. We have now got the facilities to do the European Championships and the Commonwealth Games and even the Olympics again but I wish we never got involved in the first place.

 

Why?????

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Replying to davidwinch:
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By tomtrainer
30th Jul 2012 16:46

Maybe because...

Steve-EBL wrote:

philfromleeds wrote:

 

I feel that Danny Boyle did us proud. He and the athletes and also the lottery players are the hero's. We have now got the facilities to do the European Championships and the Commonwealth Games and even the Olympics again but I wish we never got involved in the first place.

 

Why?????

I'm guessing, because of the cost to us UK subjects, but may also be because of the decrease in freedom we re suffering (eg police attack on cyclists), the increased militarisation of our streets, the rampant corporatism and the effect on our children's health of the additional McDonalds and Coca Cola advertising. Of course I may be wrong, and there may be other reasons.

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Replying to Euan MacLennan:
By Steve-EBL
31st Jul 2012 17:17

One foot in the grave?
Well I think the cost has been easily managed via gamblers and those that wish to attend in person. A burger has essential vitamins and minerals, it's the French fries you need to limit. perhaps share them instead of one each, and McDonald's now has a new fizzy drink with no added stuff and classes as 1 of your 5 a day. Perhaps the BBC should put re-runs of one foot in the grave on for those not that keen.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
30th Jul 2012 13:22

@Primeman - hope this helps

I don't have direct experience of what to do, but think that Nichola Ross Martin may have covered it in her previous guide on Computer and broadband services. The only difference that I'm aware of since then is that HMRC has relented in its classification of mobile telephones so that they can include modern smartphones.

However, I think the conditions and procedures would follow the advice provided by Jennifer Adams above, so that there could be problems unless the internet package was put in place specifically to carry out the responsibilities of the job. If it was already there, they might struggle to make the claim.

 

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By leon0001
31st Jul 2012 13:36

Danny Boyle?

I thought it was Frankie Boyle.

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By Sharland
31st Jul 2012 17:50

Business calls from home.

I prepare tax returns for clients. I can choose how I charge them. I may charge a fixed fee; I may charge on a time basis; I could charge on a cost-plus basis or more probably on what I think they will pay without complaining about the fee. Whichever way I calculate my charges, it is still a charge for the same service.

 

When I make a business call from home, I am using the facility offered by my telephone provider. When I make the call, I am using the whole of the facility provided, wholly and exclusively for business. If, during the call, I discuss non-business matters, there may be a case for disallowing the expense on the grounds that it is not wholly for business. Any non-business conversation will invariably be incidental and thus disregarded. The call will always be “necessary” otherwise I would not be making the call. The cost charged by the company for making the call will be 100% allowable, regardless of how they choose to divide the fee between fixed and variable cost. In these days of total automation of telephone systems, any division of the cost is spurious.

 

 In my view, the whole of the telephone cost should be divided as between business calls and non-business calls. The business proportion is allowable whether claimed under s336 or s316 ITEPA 2003. For HMRC to continue to maintain that the so-called line rental is not allowable is wrong. It is not sustainable either in the purpose or the letter of the law.

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Replying to nick farrow:
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By leon0001
01st Aug 2012 12:09

Business phone

Further to Sharland's comments, the phone is also used to receive calls. If there is no significant personal use within home working business hours, why not apportion on the basis of business/non business hours. If an employer requires the employee to provide his number for work at home, it must be necessary for the purpose of the duties of the employment. This is especially relevant where calls are bundled with line rental.

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By tim hervey
03rd Sep 2012 14:53

Rate to claim

EIM32815 also explains that the £4 per week from 6 April 2012 is for employees paid weekly and that £18 per month should be claimed for employees paid monthly (claim for each week/month that the employee isrequired to work at home). Don't recall there were weekly/monthly rates prior to 6 April 2012.

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By fpdbookkeeping
04th Sep 2013 10:53

Rental/license agreement template.

Quite an old article, but relevant to my current question. Does any one have a template of a rental/license agreement contract referred to above, that I could look at?

Thank you.

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