Many of us have been forced to work from home because of Covid-19. But what tax implications does this have? Nick Lovett explains all.
In the current climate more people than ever are working from home. This may be as a self-employed individual or as an employee. This clearly will incur additional costs to the household.
Some costs may be tax deductible and the legislation provides for employers to make tax free payments to employees to help to cover these costs.
In the employment situation it is first necessary to ascertain whether there is an objective requirement to work from home or if this is done as a matter of choice. HMRC have also confirmed that where an employee is required to work from home under the Covid-19 regulations, this will count as qualifying.
Where it is purely a matter of choice, there can be no requirement to work from home and any relief will be denied.
It is advisable to maintain a written record of the requirement even if this is because of Covid-19 restrictions.
Employers may make qualifying payments of £6 per week or part week the employee is required to work from home. Again, it is important that records are kept of payments actually made.
These payments will be tax free in the hands of the recipient and tax deductible in computing the taxable profit of the employer.
Should no payment be offered by the employer, the employee may still claim the cost as an employment expense. This would normally be done by a coding adjustment during the year or by a claim on a tax return or form P87 for closed tax years. The usual time limit of four years from the end of the tax year to claim will apply.
It is possible to claim a greater amount. This will require proof of the additional cost to the household. Evidence should be kept and provided to HMRC on request.
The types of expense to be considered here are heating, metered water bills, home contents insurance, business calls or a new broadband connection. They do not include costs that would stay the same whether you were working at home or in an office, such as mortgage interest, rent or council tax.
A representative period should be used, and the relevant cost compared for a period prior to working from home to one where home working has taken place. Be aware of fluctuations in unit costs of some utilities.
There may also be a claim tax relief on equipment bought, such as a laptop, chair or mobile phone. Here a claim to capital allowances may be made and Annual Investment Allowance would enable the employee to offset the entire cost against earnings for tax purposes.
Claims may only be made where the equipment is needed to do the job and it is used for work with no significant private use of the equipment.
Self employed people
As far as self-employed individuals are concerned again, there are two methods of calculating relief.
Flat rate expenses: Firstly, a flat rate deduction scheme applies and can be adopted. There is no income limit restricting the entitlement to claim.
The deduction is based on the number of hours spent wholly and exclusively on core business activities in the home and is only available if these hours exceed 25 per month.
Core business activities are defined as including, providing goods and/or services, maintaining business records and marketing and obtaining new business.
The rates are as follows:
Hours of business use per month Flat rate per month
25 to 50 £10
51 to 100 £18
101 and more £26
Alternatively, it is possible to claim the actual expenditure. In this instance expenditure falls broadly into two categories being fixed costs and running costs.
Fixed costs are dealt with as follows.
Insurance: If the trade use is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed. Otherwise, an appropriate part of the premium can be allowed.
Council Tax (Domestic Rates in Northern Ireland): The Council Tax (Domestic rates) is a tax on property. If trade use is established the appropriate proportion of the tax may be allowed under the normal rules for the deduction of expenses.
Mortgage interest: If part of the home is used solely for the trade then an appropriate part of the mortgage interest is an allowable deduction. Repayments of capital are not allowable. If profit is computed using cash basis, the maximum that can be claimed for interest and costs of obtaining finance is £500.
Rent: Like the mortgage payments, part of the rent is an allowable expense where part of the property is used solely for trade purposes.
Repairs and maintenance: A proportion of the cost of general household repairs and maintenance is allowable in line with the proportion that the house is used solely for the trade. Examples include the general redecoration of the exterior or repairs to the roof.
The rules around running costs are as follows.
Utilities, cleaning, water, etc.: The actual or proportionate cost of cleaning and utilities within the home office would be allowable.
In the case of minor trade use of the premises, such as writing up records, there is no trade use of water and so none of the water charge is allowable.
Other expenses – telephone and broadband: Telephone and broadband costs do not relate to the home itself and are not household expenses. The following information applies whether use of home expenses are based on actual costs or the flat rate amount.
The cost of business calls is allowable. Also allow a proportion of the line rental (based on the ratio of trade use to total use). This proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure.
The same apportionment should be used for broadband where there is no separate business only connection installed.
Where private use is not significant, the full cost of telephone and broadband service can be claimed as a business expense.
Impact on CGT
One additional point to be aware of is the exclusive use of part of the home may affect any capital gains tax payable on the disposal of the property in the future.
Normally the gain would be covered by Private Residence Relief. This relief would not be due on a proportionate amount of the gain where part of the home has been used exclusively for business purposes. Any claim should be restricted by reference to the part of the home occupied for business purposes and the period of time it was so used.
This restriction does not apply where there is mixed (business and private) use of that part of the home.
• Nick Lovett, Tax Manager, Vantage Fee Protect