Home Working Allowance for Employees -COVID19 update

*Please note the information in this article may be out of date

If you are working from home for your employer you may be entitled to claim the working from home allowance? At £312 a year tax free, it is worth finding out if you qualify.

Note, this article is regarding Employees working from home and is very different to allowances for the Self-employed who work from home. 

Working from home is becoming all the more possible and even encouraged. Additional time spent at home impacts the fuel, water, telephone and electricity bills. They are ways to reclaim some of those costs, but eligibility needs to be addressed from the outset.

In some case, employers will agree to reimburse the additional costs homeworking places on the employee. HMRC have a flat-rate working from home allowance, to make this process easier. In order to be eligible to claim any more than the flat-rate, an employer must be able to prove that working from home is necessary. Where working from home is optional, it is very unlikely that HMRC will allow the employer claim costs above the flat-rate. See examples on HMRC's guidance.

Where an employer will/ does not reimburse these expenses, the alternative is for the employee to claw back whatever they can through tax relief. This is possible as long as a home working agreement is in place with the employer, or working from home is addressed in the employees contract. Employees who work from home by choice are treated differently when claiming directly. In general, they cannot claim tax relief from HMRC if their employer does not reimburse some/all of their expenses.

Both options can result in the HMRC flat-rate working from home allowance, being claimed, but there are also options for situations where the flat-rate does not cover the additional expenses involved.

In this guide we go through both scenarios so you can choose which option is best suited to your situation. 

*COVID19-HMRC will accept that employees working from home because their employer’s offices have closed - or because the employee is following advice to self-isolate - meet these requirements. Newly home-based employees will be eligible to receive the allowance tax free from the date that their employer agreed they could work from home, or from when the initial government advice to work at home was announced in March 2020. For information specifically relating to the purchase of equipment for COVID-19 homeworkers, see the bottom of this article.

First Option: Employer reimbursement of costs- tax exempt.

Since 2003, employers have been able to make tax-free payments to cover the additional costs incurred by an employee who works from home. These payments are exempt from income tax or NIC's. This system relies on the employer agreeing to pay a tax-free allowance to the employee towards the costs incurred by working from home.

Who is Eligible?

To qualify, an employee needs to be working from home because it is specified as part of their job, or else a home-working agreement with the employer needs to be in place. This means that the employee is regularly performing some or all of their duties from their home. HMRC are strict about who qualifies for this exemption. They may check whether the employee the expenses are related to, meets their criteria to be classified as a homeworker. They will look for copies of the employee homeworking agreement or employment contract for evidence of this fact. If you don't have this in place you could be looking at a tax charge. Occasional working at home which is not by arrangement does not count as homeworking – for example taking work home in the evenings will not qualify the employee for tax exemption. There must be an arrangement to work from home and not at the employer’s premises, in place. It is best for this to be a written agreement.

*COVID19 Update - HMRC will accept that employees who are either :

1. working from home because their work places have closed,  or
2. working from home because they have been advised to self-isolate, 

have met these eligibility requirements. Employees will be eligible to receive this tax free allowance from their employer, starting from the date that their employer agreed they could work from home, or from when government advice was announced. Being eligible to receive this allowance does not mean you automatically will. Your employer must agree to pay it to you first and then claim the allowance. 

What is Covered? 

Flat-rate

A tax-free allowance can be paid by the employer to cover the reasonable additional household expenses that an employee incurs in carrying out the duties of the employment at home, under homeworking arrangements. 

There are a couple of ways to agree a figure for this allowance. The most straightforward one is to use the flat-rate figures supplied by HMRC:

• £6/week for weekly paid employees (£4/week prior to 6 April 2020)  OR
• £26/month for monthly paid employees (£18/month prior to 6 April 2020).

Advantages of using this flat-rate system is there is no need for the employer to justify the expenditure and the employee does not need to keep records of their additional costs.

 COVID19 - guidance from HMRC for employers/employees -Check what expenses are taxable for homeworking employees during Covid19 pandemic.

Above Flat-rate

Sometimes the flat-rate is not enough to cover additional costs to the employee. In this case a larger tax-free allowance may be agreed, but sufficient evidence of the additional costs must be supplied. Remember, to claim above the flat-rate, working from home must be necessary, rather than optional. There are two options available when working out this amount.

1. Scale Rate:

Using guidance from HMRC a scale rate payment can be calculated, which reimburses the average additional costs of working at home. It is possible to agree to increase this annually. Once the scale rate has been agreed with HMRC, employees are not required to keep subsequent evidence of costs. (It is unlikely that HMRC will have the time or resources to agree scale rates during the COVID emergency).

2. Work out the actual additional costs. The second way to work out a higher than flat-rate allowance is for the employer to evaluate the actual increase in household costs, due to the employee working from home. Allowable additional costs include:

• additional heating and lighting costs of the work area within the home
• additional home contents insurance
• metered water (you cannot claim for water rates)
• Business phone and internet access charges- additional costs only
• business rates where an additional cost is incurred

According to HMRC: 'additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent, council tax or water rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations or the cost of furniture or office equipment. ' HMRC

When it comes to charges such as broadband, landline charges and waste removal,  HMRC say that if the employee is already paying the charge before starting working from home, then this is an existing expense and cannot be reimbursed tax-free. If, however, the employee is not connected to broadband and needs a connection to work from home, then this would qualify as an additional cost which the employer could reimburse tax-free. If there is a noticeable increase in cost of a service, due to an upgrade needed after the employee began working from home, then the additional cost could be reimbursed. Only additional costs incurred by the employee as a result of homeworking can be reimbursed by their employer tax-free.

Employers can give an employee office equipment and furniture. These would be deemed tax-free benefits in kind. Although a tax liability may arise if ownership of these items trasfer to the employee at a later date, or if the use is not wholly for work purposes. This area is covered in more detail at the bottom of this article, including the special measures brought in for COVID19 homeworking.

Second Option: Employee Claims Tax Relief Directly

If your employer does not reimburse additional costs incurred as a result of you having to work from home, then you may be able to claim the tax-free allowance directly, as long as working from home is necessary and not optional.

In cases where an employer reimburses you for some of the additional costs, but not all, you may be able to claim an allowance for the additional costs directly. Please note that if your employer pays you a homeworking allowance, then you must reduce your claim by this amount. Again, you can only claim above the flat-rate in cases where working from home is not optional.

The costs incurred must be costs wholly, exclusively and necessarily for your work. If you have not been claiming this allowance but should have been, do not fear, you can claim for it as far back as 2016/17. This allowance is free from tax or NIC's.

 Who is Eligible?

Eligible employees must be able to prove that their home is their workplace. They must also be able to prove that the additional expenses are incurred wholly and exclusively while carrying out their employed role. Working from home needs to be specified as part of the job, or else a home-working agreement (preferably written) with your employer needs to be in place.

*Where working from home is optional and the employer does not reimburse at least some of the costs, employees will not be eligible to claim this allowance.

According to HMRC, these are the conditions under which they will accept that an employee's home is their workplace:

• 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 and that represent all or part of the central duties of the employment (see EIM32780)
• those 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.

COVID19 During the COVID-19 pandemic, HMRC will accept that employees working from home because their employer’s offices have closed - or because the employee is following advice to self-isolate - meet these requirements. Newly home-based employees will be eligible to receive the allowance tax free from the date that their employer agreed they could work from home, or from when the initial government advice to work at home was announced in March 2020.

 How Much can you Claim?

There are some differences between what an employee can claim in allowances and what an employer can reimburse an employee for. In the case of an employee claiming allowances which have not been reimbursed by their employer, the following can be claimed:

• additional heating and lighting
• metered water (you cannot claim for water rates)

An employee cannot claim relief for the following expenses:

• mortgage interest or rent
• insurance
• council tax
• water rates

Often it is easier to just use the HMRC flat-rate, without having to justify the figures, which are:

• £6/week for weekly paid employees (£4/week prior to 6 April 2020)  OR
• £26/month for monthly paid employees (£18/month prior to 6 April 2020).

An additional claim can be made for business phone calls, more on what can be claimed from HMRC here.

 COVID19 - guidance from HMRC for employers/employees regarding what expenses are taxable for homeworking employees during Covid19 pandemic

How to Claim as Employee?

There are a few ways for employees to claim the home working allowance:

1. Through a self-assessment tax return.
2. Online/Post: If not registered for self-assessment, then an employee can use the form P87 procedure to claim this allowance. No more than £2,500 of expenses can be claimed using form P87. Claims above £2,500 will mean registering for self-assessment.
3. Phone: You can claim by phone if you’ve already claimed expenses in a previous year and your total expenses are less than £1,000.

Whichever method you use, remember to retain receipts and calculations as evidence to support the claims made above the flat-rate.

Purchases of Office Equipment for Working from Home

Employer Purchased:

Equipment, such as laptops, chairs, desks, keyboards, etc., that have been purchased by an employer so an employee can work from home, are considered a tax free benefit, so long as their use is solely for work purposes and there is 'no significant' private use.

In situations where there is significant private use, then a benefit in kind that is taxable for the employee, will arise. Employers can specify in work agreements, that equipment is not intended for private use, to avoid this.

In the event that ownership of the equipment transfers to the employee at a later stage, then a taxable benefit in kind for the employee will also be likely.

Employee Purchased and Employer Reimbursed:

Usually, when an employer repays/ reimburses the cost an employee spent on work related office equipment, a tax liability for the employer will occur.

COVID19 Temporary Exemption from Tax and NIC's on Employer Reimbursed Equipment Costs:

In May 2020 the Treasury announced temporary tax relief in the case of home working equipment costs for employees, who may be required to work from home during the pandemic. Where employees have had equipment costs reimbursed by their employers, no taxable liability will arise if certain conditions about the costs have been met. According to HMRC these are:

1. That equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak, and
2. The provision of the equipment would have been exempt from income tax if it had been provided directly by the employer.

Also, private use of the equipment should be minimal.

The exemption is a temporary measure, covering the period from 16th March 2020 until the end of the tax year 2020/21.

Employers should note that exemption is dependent on this benefit being made to all employees who need to work from home, equally.

Significantly, HMRC have confirmed that no benefit in kind will arise if at a later point, the employee returns to work and retains the equipment.

Employee Purchases and Employer Does Not Reimburse:

In the situation where the employer does not reimburse certain equipment costs to the employee arising from working from home, claiming in any other way from HMRC is unlikely to be successful. Equipment such as desks, chairs etc. are unlikely to meet the requirements set out by HMRC to qualify as capital allowances.

The reason you cannot claim for equipment like desks, chairs, etc., is that expenses you incur in connection with your job have to meet a test to qualify for tax relief. This test is that the expense is incurred ‘wholly, exclusively and necessarily in the performance of your duties’. The office chairs/desks were incurred to put you in a more comfortable position to do your job, rather than being used in the actual duties of your job itself. 

Costs for items such as printer ink, postage, paper, if not reimbursed by your employer, could be reclaimed from HMRC through self-assessment or Form P87. The reason is that these costs are all necessarily incurred by you in doing your job.

Employees should seek reimbursement from their employer for costs of office furniture, as it is very difficult to gain tax relief directly from HMRC.

Further helpful links:

COVID19 - guidance from HMRC for employers/employees regarding what expenses are taxable for homeworking employees during Covid19 pandemic

HMRC guidance document on what expenses are allowable if working from home.

HMRC guidance on how to decide whether an employee’s home is a workplace.

 Gov.uk Eligibility tool for Working from Home Allowance

Making a Form P87 return

Self-employed Working from Home Expenses.