Whether you are an employee, sole-trader, or director of a limited company, it is highly likely that you have had to work from home during the Covid-19 pandemic. Whilst not only blurring the lines between our work and private life, working from home also blurs the lines between business and private expenditure. We have had many clients wanting to know whether they can get tax relief on working from home costs, which they often can, but care must be taken as there are several tax pitfalls to watch out for.
Claiming home office costs
By working at home, you will likely incur additional household costs for things such as light, heat and power. What you can claim will depend on whether you are an employee or self-employed:
a. Working from home as an employee
If you are an employee and you are required to work from home, then you can get tax relief for the additional household costs that you incur. There are two methods you can use to calculate these additional costs:
- You can claim the exact amount of additional costs incurred whilst working from home on expenditure such as gas, electric, water, phone calls and internet. You will need to have sufficient evidence to justify the claim.
- Or you can claim £6 per week from 6 Apr 2020. With this method there is no need to keep evidence of additional cost.
Your employer can refund you these additional costs tax-free. However, if they do not, you can still get tax relief for the costs by including them on your self-assessment or completing a P87 form if you are taxed solely through PAYE.
Watch out though – you can only claim for additional costs if you must work from home. This could be because you are required by government rules, or your place of work is closed. If you work from home by choice, or have the option to go into work, then you will not receive any tax relief.
b. Working from home whilst self-employed
If you are self-employed and work from home, you will be able to deduct a portion of your household running costs that can be attributed to business use. Evidence will be needed to support your claim, and a reasonable apportionment method used. However, where a home is used partly for business purposes, the simplified expenses rules allow for a flat rate deduction. The amount to be claimed will depend on the number of hours spent wholly and exclusively on core business activities.
The flat rates are as follows:
|Number of hours worked
|Flat rate per month
|25 to 50
|51 to 100
|101 or more
In addition to the flat rate, you can also claim a portion of your telephone and internet costs, as well as some other fixed costs.
Provision of office equipment to employees for home working
Computer and office equipment often needs to be purchased to allow employees to effectively work from home. The tax treatment will depend on the specific circumstances.
a. If the employer purchases
If the employer purchases the equipment, then the business will own the asset. The company should be able to reclaim any VAT charged and get capital allowances on the equipment. Provided that any private use of the company equipment is insignificant, there will be no taxable benefit-in-kind charge for the employee.
Watch out though – if the business allows the employee to keep the equipment when they return to work, a taxable benefit in kind as well as VAT charges will apply on the market value of the equipment at that date.
b. If the employee purchases and the employer reimburses
There has been confusion over the tax treatment of employee expense claims for equipment, as a result of changes in policy from HMRC. Employee expense claims for office and computer equipment would normally be subject to tax and national insurance. However, due to the impact of the pandemic, temporary measures were brought in in June 2020 and subsequently extended so that such expense claims will not be taxable until 5 April 2022. In order for this exemption to apply, the following conditions must be met:
- The equipment was obtained for the sole purpose of enabling the employee to work from home as a result of the coronavirus outbreak, and
- The provision of the equipment would have been exempt from income tax if it had been provided directly by the employer
Watch out though – this exemption is conditional on reimbursement terms being the same for all employees who work from home. For example, it would not apply if directors reimbursed themselves but don’t reimburse other staff too.
According to HMRC’s current guidance, unless the employer has specified that the employee must transfer ownership of the asset, the equipment belongs to the employee. This means that if the employee subsequently returns to work and retains the equipment, no benefit in kind will arise at that point as there is no transfer of ownership.
Watch out though – if the position is that the employee owns the asset then HMRC may not allow the business to reclaim any VAT back on the purchase, as they will argue the supply was made to the employee personally and not the business. However, this will depend on the specific circumstances of the individual case.
c. If the employee purchases and is not reimbursed
If the employee purchases their own equipment without being reimbursed by their employer, it is difficult for them to obtain tax relief. This is because the expense is only deductible if it is wholly, exclusively, and necessarily incurred in the performance of the duties of the employment. HMRC often argue that office equipment merely puts an employee in a position to do their duties in the first place, rather than being incurred whilst performing them. Employer reimbursements therefore remain the better option.
Home and garden offices
During the pandemic, there has been an increased popularity in converting outbuilding and garages into home offices or building new offices in gardens. Whilst many people think they can claim the costs through their business, care must be taken to avoid other problems. What can be claimed will depend on whether you are a sole-trader or operating through a limited company.
a. Constructing a home office as a sole trader
Unfortunately, the construction of a home office is unlikely to result in any significant business tax savings. This is because buildings and structures are not eligible for capital allowances as they do not count as plant and machinery. The structures and buildings allowance will also not apply as the structure is located in the grounds of a residence. The only possible capital allowances claim would be for ‘integral features’ such as electrical systems and lighting. However, any capital allowances would need to be apportioned for private use.
If VAT is charged on the construction, then this can be reclaimed but will also need to be apportioned, with only the business element being reclaimable.
Watch out though – if you claim that the home office is used 100% for business in order to claim all the VAT and integral feature capital allowances, then this could cause other tax problems. Whilst the sale of your main dwelling is normally free from capital gains due to principal private residence relief, this will not apply to areas used exclusively for business. CGT will therefore be payable if your gain exceeds your annual exempt amount. You may also require planning permission and possibly pay business rates if you construct a wholly commercial building.
b. Constructing a home office through a limited company
If you are a director of a limited company, you will need to decide whether you will own the home office personally, or if it will be a business asset.
If you own the home office personally, you will not be able to claim any construction costs through the company. However, it is possible for you to rent the space to your company in order to recoup some of the construction costs, although this will need to be included on your self-assessment as income. Your business can deduct these rent costs as an expense provided it is a fair market rate.
If the home office is a business asset, then there will be tax advantages for the company. Like sole traders, the company will be able to claim capital allowances on integral features (although these will not be apportioned). VAT can also be reclaimed, but only the apportioned business element.
Watch out though – it would be difficult to argue that a room in your house is not available for private use, and therefore a taxable benefit-in-kind could arise. Also, as the business owns part of your home, this could result in multiple issues relating to mortgages, insurance, planning-permission, and business rates.
If you sell your home, personal private residence relief will not apply to the area used for business. The portion of the sale price relating to the market value of the office will also need to be paid back to the company, as it is a company asset. Additionally, if you decide to transfer the home office back to personal ownership you will need to repay the company for constructing it, otherwise this will be deemed to be a taxable benefit provided to you.
The information provided in this blog is intended to give a general overview of the tax implications of working from home. However, as you can see, this is a complicated area, and any tax relief will depend on the specific circumstances of the case. If you are thinking of constructing a home office, looking to make a claim for working from home, or would like additional detailed advice, please do not hesitate to get in touch with a member of the Crowther’s team.