Generally, where expenses payments are made to, or benefits-in-kind are provided for, an employee they are deemed to have been made or provided by reason of that employment and are regarded as part of the reward for the job.
However, section 316A, Income Taxes (Earnings and Pensions) Act 2003 states that no liability to income tax arises in respect of the payment made by an employer to an employee in ‘respect of reasonable additional household expenses which the employee incurs in carrying out duties of the employment at home under homeworking arrangements'.
Section 316A ITEPA 2003 provides an exemption for payments made by an employer to an employee in respect of the reasonable additional household expenses which the employee incurs in carrying out the duties of their employment at home under homeworking arrangements. HMRC accepts that homeworking arrangements exist where two tests are met:
there must be arrangements between the employer and the employee
the employee must work at home regularly under those arrangements.
In the current circumstances, with employers requiring their employees to work from home for a limited or even indefinite period of time as a result of a temporary closure of the business premises, HMRC accepts that for the duration of that period these two tests would be met.
There is nothing in s316A that requires homeworking arrangements to be in place for a particular period of time. If not already working under homeworking arrangements, HMRC would agree that employees would be covered by the exemption when either the employer agreed they could work from home or from when government advice was announced.
Homeworking arrangements means arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. The arrangement does not need to apply to all employees.
It is not mandatory for the arrangement to be in writing, but it must be done as part of a formal process. The exemption does not apply where an employee works at home informally (ie an employee takes work home in the evenings).
The employee must work at home regularly so the working at home is frequent or follows a pattern. For example, an employee agrees to work three days each week on the employer’s premises and two days at home. This will be the case even if the days on which the employee works at home vary from week to week.
Where an employee works regularly from home under agreed ‘homeworking arrangements’, their employer may pay up to £6 per week tax-free from 6 April 2020 (£4 per week up to 5 April 2020) without requiring supporting evidence of the cost. HMRC would expect that £6 per week would be sufficient for most cases, particularly where the additional costs are only for heating and lighting the work area.
If an employer doesn’t reimburse an employee the employee can ensure their notice of coding is amended to account for the £6 per week where additional cost has been incurred. HMRC has stated that it will apply this for the full tax year even where the employee has worked from home for part of that year.
There are two ways to provide for a greater amount:
The employer can agree with HMRC in advance on a scale rate payment that is calculated to reimburse the average additional costs that employees meet while working at home. The agreement can provide for the scale rate payment to be increased annually in line with inflation OR
The employer can reimburse the actual additional costs incurred by each employee. In such cases, the employer is expected to keep records to show how the payments have been computed.
Additional costs incurred by employees include the extra cost of:
heating and lighting the work area
metered cost of increased water use
increased charges for internet access (please see below)
business telephone charges
insurance (if applicable)
business rates (if applicable).
The additional household costs must be reasonable and must be incurred in carrying out the duties.
Costs that would be the same whether or not the employee works at home (and as a result are not allowable) are:
council tax and water rates.
If an employee who begins to work from home under ‘homeworking arrangements’ is already paying for a broadband internet connection at home, there is no additional expense to be claimed. If the employer reimburses the employee’s broadband internet charges in such circumstances, the reimbursement is taxable.
But if the employee does not already pay for a broadband internet connection at home and needs one in order to work from home under ‘homeworking arrangements’, the broadband fee is an additional household expense that the employer can include within tax-free homeworking payments.
While not directly connected with payments made under working from home arrangements, it is worth noting that if the employer has provided the employee with an interest free loan (to assist in case of hardship) of up to £10,000 in a tax year, this is a non-taxable benefit.