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Tax relief for employees and directors using their homes as an office
15 May 15 | By: Jas Jhooty
Employees can only make a claim against their employment income for expenses that they’ve incurred wholly, exclusively and necessarily in the performance of the duties of their employment.
HMRC then argues that for most, if not all, employees who work from home, they don’t do so out of necessity. It’s generally the case that they simply need somewhere to work, but it can be anywhere and the home is as good a place as anywhere.
This has the effect of denying relief for employees’ household expenses generally when they work from home.
What about homeworker’s additional household expenses
However, there is an exemption in the tax legislation that allows employers to make a tax-free and consequently NIC-free reimbursement of an employee’s additional expenses of working from home, where the employee regularly works from home under arrangements between the employer and employee.
It’s necessary for the employee to prove their additional household expenses arising from working from home, but HMRC will accept a tax-free reimbursement of up to £4 per week (or £18 per month) without any evidence of the additional expenses being necessary.
If the amount exceeds £18 per month (or £4 per week) and no evidence of the additional household expenses is provided, the excess over £18 per month is tax and NICable.
What if the employer does not pay any homeworking allowance
If the employer does not pay any homeworking allowance, a deduction will be allowed for reasonable expenses where the employee does not have a permanent office base.
HMRC has clarified that unreimbursed homeworking expenses are only valid as a deduction where the employee’s situation fulfills all of the following conditions :
- the main duties of the employment are carried out at home;
- those duties require specific facilities;
- either the facilities are not available at the employer’s premises, or the nature of the duties require the employee to live so far from the premises that it is unreasonable for him or her to travel there; and
- at no time before or after the contract is written is the employee able to choose between working at the employer’s premises and elsewhere.
In particular, HMRC has stated that no deduction can be claimed for council tax, rent, water rates, mortgage payments or insurance premiums.
Alternative basis for company owner managers
As noted above, directors are generally in the same position as other employees, and unless they can substantiate a higher ﬁgure they can only be reimbursed £4 per week tax free by their companies, even though they might work at home most, or even all, of the time.
Where the director is also the company owner, there is another alternative. They can charge their company a rent for exclusive use of the space for the part of the day that it’s used. This should be done by way of an official agreement between the property owners and the company to prevent any future arguments with HMRC. (Please contact us if you want to receive a free sample agreement form.)
The household costs can then be deducted from the rent in the same way as a self-employed person can deduct them from their business proﬁts.
The amount of rent that should be charged needs to exceed the amount of deductible costs, but can be any amount up to a reasonable market rent for the space used. Any proﬁt will then be taxable on the owner manager, but this might be useful to use up any unused personal allowance.
Capital Gains Tax implications
As long as the room is not used exclusively for business purposes there will be no capital gains tax implications. Non-exclusive business use of a room can be demonstrated by having a bed in the room or occasionally using an airer to dry damp laundry in the office space.
How emTax can help
The £4 per week homeworking allowance can be increased if HMRC can be persuaded to agree the reimbursement of a higher amount. This is usually achieved by conducting a sampling exercise to prove to HMRC that £4 per week is an insufficient amount to cover the additional costs relating to having a room at home as an office. Our consultants can help to prepare such a submission to HMRC, on your behalf.
Please contact us if you are interested in this or any other employment tax related service.