The Inland Revenue has issued guidance on the taxation of reimbursed expenses and benefits for employees who work from home.

An article in Tax Bulletin 68 notes that increasing numbers of employees are working wholly or partly at home.

A recent report by The Work Foundation ('Time to go home: embracing the homeworking revolution' by Tim Dwelly and Yvonne Bennion) suggested that 2.2m employees in the UK (about 7.4% of all employees) work at home at least one day a week using a telephone or computer. Around one million employees work mainly at home. The number of employees working at home is increasing by around 13% a year.

The great majority of these home workers are employees who are sometimes referred to as teleworkers; workers who rely on the use of computers and telecommunications to carry out office work at home.

In the last few years a number of changes to legislation have been made to help employers support teleworkers and other employees who agree to work at home without incurring a tax charge or liability for NICs.

The Tax Bulletin article looks at that legislation and also at tax relief for expenses incurred by teleworkers as a result of working at home.

Employer provided equipment

Employers can now provide all of the computing facilities, telecommunications links, office furniture and supplies that a teleworker needs to work at home, without a tax charge. This is achieved by:

Section 316 ITEPA 2003, which provides an exemption for provided furniture, equipment, supplies and services where the employer's sole purpose in providing them is to enable the employee to perform the duties of the employment and any private use is not significant,

an article in Tax Bulletin 49 ("Schedule E benefits in kind - part business use and part private use") provides further guidance,

this exemption can extend to the provision of a telephone line in the employee's home and to broadband Internet access in the circumstances described in EIM21615 in the Inland Revenue's Employment Income Manual;

Section 320 ITEPA 2003, which permits a limited exemption for provided computer equipment up to the first £500 of cash equivalent. Where this limit is exceeded the exemption in Section 316 ITEPA 2003 can apply to the excess.

Where benefits are exempted from tax there is no liability for Class 1A NICs (Section 10(1)(a) SSCBA 1992).

Expense payments to the employee

New legislation in Section 316A ITEPA 2003 applies with effect from 6 April 2003 to prevent any tax charge where an employer makes payments to employees to reimburse the additional household expenses that they incur in working at home. There is further guidance on this at EIM01472. Such payments could already be made without a NICs liability arising.

Exempt payments can be made where there are arrangements between the employee and the employer under which the employee regularly works at home. This covers employers' homeworking policies but will not cover employees who work at home informally and not by arrangement with the employer. So, for example, the new exemption will not apply to employees who simply take additional work home in the evenings.

The exemption applies to employees who do some or all of their work at home with the agreement of the employer instead of working on the employer's premises. For example, the new exemption could apply to payments made to an employee who arranges to spend two days each week working at the office and the other three days working at home.

The additional expenses that the employer may reimburse are those connected with the day to day running of the employee's home. This might include additional costs of heating and lighting the work area, or the metered cost of increased water use. There might also be increased charges for Internet access or telephone use. In some cases work at home may lead to an increase in household contents insurance or to a liability for business rates. It might be difficult for employers to calculate the exact amount of additional costs that an employee is incurring as a result of working at home. So the Revenue has published a guideline rate of £2 per week that can be paid to employees working regularly at home without the employer having to justify the amount paid or the employee having to keep any records to demonstrate the additional expenditure.

The £2 per week figure is not a maximum, and greater amounts can be paid where the employer provides evidence to justify them. There are two ways to do this. The employer can agree in advance with their tax office on a scale rate payment that is calculated to do no more than reimburse the average additional costs that the employees are meeting while working at home. It may be useful to agree that the scale rate payment can be increased annually in line with inflation. If the employer has agreed a scale rate payment based on reasonable estimates of additional household costs derived from records of costs kept by employees, the Revenue says it is not necessary for employees to keep subsequent evidence of costs incurred.

Alternatively, an employer may prefer to reimburse the actual additional costs incurred by each employee. In such cases the Revenue says it would expect the employer to keep records to show how the payments have been computed. In turn this will depend on evidence retained by the employee about the amount of additional costs.

Expense deductions

Travel expenses The rules on travel for necessary attendance in Sections 338 and 339 ITEPA 2003 assist teleworkers. Relief is available for home to work travel unless that travel is ordinary commuting. Many teleworkers do not have an ordinary commuting journey and are entitled to tax relief for all of their business travel. Where those costs are met by the employer, they can be covered by a dispensation in the normal way.

In this context the facts of the recent case of Kirkwood v Evans (74 TC 481) are slightly unusual. Mr Evans worked mainly at home but travelled regularly on one day each week to his employer's office. There was no evidence that he would do so for a limited duration or for a temporary purpose. So his employer's office was a permanent workplace and he was not entitled to tax relief for his travel. This, says the Revenue, simply shows that a teleworker might still have an ordinary commuting journey.

Many teleworkers no longer use the employer's office as a permanent workplace. Visits to the employer's office become irregular or self-contained, so that the employer's office becomes a temporary workplace. For example, teleworkers may occasionally need to visit the office to attend team meetings or similar events. Irregular visits, or regular but self-contained visits, do not make the office a permanent workplace. Where the employer meets the cost of such visits they can be covered by a dispensation.

Where a teleworker who was previously office based begins to work from home, the status of the employer's office as a permanent workplace needs to be reconsidered in the light of the new working pattern. The fact that the employer's office was once a permanent workplace does not mean that it must remain one.

Household expenses

The exemption for payments by employers in Section 316A ITEPA 2003 is wider than the existing relief for employees' expenses in Section 336 ITEPA 2003. So the fact that an employer could make exempt payments to an employee for additional household expenses does not mean that the employee would be entitled to relief for unreimbursed expenses.

The principal difference between the rules for exemption and those for deduction is that the exemption applies wherever an employee works at home under homeworking arrangements with the employer. By contrast an employee is only entitled to a deduction for expenses incurred in working at home where the nature of the employment itself would require any employee to work at home.

This distinction can be illustrated by Kirkwood v Evans. Mr Evans worked at home out of choice under his employer's voluntary scheme. If his employer had met the additional household costs he incurred, then the payments would now be within the scope of the exemption in Section 316A. However, there was nothing about the nature of his work that dictated working at home and so he was not entitled to a deduction under Section 336 ITEPA 2003.

The Revenue says it anticipates that most employees who work at home under homeworking schemes will be doing so by choice and so will not be entitled to a deduction for any unreimbursed additional household expenses.

Source:
TaxZone.co.uk
23 December 2003

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