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Expert guide: Tax and homeworking

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26th May 2006
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One of the issues raised (again) by the withdrawal of the Home Computer Initiative or, to be precise, the repeal of S.320 ITEPA 2003, is the question of how far the tax system responds to changes in working practice in the world of work, and in particular how well it adapts to the practice of working from home, in this case for employees. As you might expect, the answer is not very well: an original set of guidelines about homeworking from the Inland Revenue were withdrawn because they gave far too much away, suggesting that there could be deductions for a fractional share of mortgage payments or Council Tax.

Though the question is also significant for the self-employed, the difference in the rules is of course substantial. Why? Because that's the way it is: the Taxes Acts have required expenditure to be incurred wholly, exclusively and necessarily for the purposes of the employment since longer than any of us can remember.
In modern speak that's S.336 of ITEPA 2003
The general rule is 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.

HMRC is at pains to stress that it does not see this change as being tremendously important or getting in the way of business. It is also quite keen to stress that this latest change was not its idea - indeed the main motive appears to have been political: the Chancellor has decided that there are better ways to encourage and widen computer ownership and computer literacy. As a result we have moved from a situation where you had to ask one question ' does this fall within the definition of computer equipment (admittedly a question that seems to have caused problems now that everything more complicated than a toothpick has a computer in it) ' and we are back into benefits in kind if there is more than "insignificant private use".

One interpretation is that if the machine is provided for work because the employer wants you to be able to work from home or on the move, that's the end of the story: if there is some private use, it can be disregarded. That seems to make sense, since once the employer has provided the computer, then any private use of the computer is not going to cost anything at all. I am writing this on a train that is full of people apparently working on their laptops, but who may equally be playing solitaire or watching a DVD.

Although I quoted S.336 for its relevance to homeworking generally, for computers (or any other assets) made available by the employer we are actually looking at S.316

(1) No liability to income tax arises by virtue of Chapter 10 of Part 3 (taxable benefits: residual liability to charge) in respect of the provision for an employee of accommodation, supplies or services used by the employee in performing duties of the employment if conditions A and B are met.
(2) Condition A is that any use of the accommodation, supplies or services for private purposes by the employee or members of the employee's family or household is not significant.
(3) For this purpose, use "for private purposes" means'
(a) use that is not use in performing the duties of the employee's employment, and
(b) use that is at the same time both use in performing the duties of an employee's employment and other use.
(4) Condition B is that where the provision is otherwise than on premises occupied by the person making it'
(a) its sole purpose is to enable the employee to perform the duties of the employee's employment

But the differences between the two sections means that this is a conceptual mess. EIM 32825 says this
Section 316A only provides an exemption for employer payments. It does not change the law on deductions for employees' unreimbursed household expenses. The circumstances in which an exempt payment can be made are much less restrictive than the circumstances in which an employee is entitled to relief for household expenses under Section 336. In particular, exempt payments can be made to employees who work at home under a voluntary homeworking scheme. So the fact that an exempt payment has been or could be made does not mean that the employee is entitled to relief for household expenses.

Confusion is rife. At a recent meeting an HMRC technical specialist suggested that the provision of the computer must be "necessarily" for the purpose of the employment. But that isn't so. This legislation will also apply to the directors of personal service companies as well, with all the added complications that means.

To add to the difficulty, technology moves faster than HMRC. Quoting the manuals again on what is computer equipment :
"A common example is the Personal Digital Assistant or PDA. Early PDAs were little more than an electronic diary, but as the technology evolved some, such as the Blackberry, had a primary function as a mobile phone with e-mail and Internet connection. These were exempt from tax under the mobile phone exemption in Section 319 ITEPA 2003. That exemption continues to apply to these PDAs.

"More recently the PDA has developed to such an extent that it now provides additional functions more typically associated with a computer and so can no longer be considered to be primarily a mobile phone but where an employer provides an employee with such a PDA it [was] exempt under Section 320."

I wouldn/t argue with that, having just passed a billboard advertising Microsoft Office for mobile phones. In fact it has been said that the problems with the legislation were caused by game consoles and MP3 players, or more generally by what you might kindly call over-enthusiastic marketing of "salary packages". That has a strong air of afterthought about it.

There is the potential here for excitable inspectors to cause all sorts of problems. We all know how difficult 'private use' arguments can get. It is important that when HMRC says publicly that it is business as usual, that is not seen as carrying the privare message that it is open season on benefits in kind.

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