01 December 2020

The CIPP’s policy and research team outlines the taxation and reporting rules

As the outbreak of coronavirus intensified, and stringent social distancing measures were implemented across the UK, the government instructed employers to allow their staff to work from home, where possible. This placed a spotlight on the equipment and additional household expenses and benefits that employees may incur or receive whilst working from home. As it looks likely that the number of people who work from home on a permanent basis will increase significantly, it is important to discuss the tax and National Insurance contributions (NICs) implications and reporting obligations for employers in relation to homeworking expenses and benefits.

Homeworking expenses include any equipment, services or supplies that an employer provides to employees who work from home. Examples include computers, office furniture, internet access, and any stationery such as pens and paper. These expenses also cover additional household expenses, inclusive of any gas or electricity charges that an employee may incur as a result of working from home, instead of within a workplace provided by the employer.

Depending on the circumstances there are certain exemptions for homeworking expenses so that they do not need to be reported to HM Revenue & Customs (HMRC). However, homeworking expenses still need to be reported if they are part of a salary sacrifice arrangement.

There is no requirement to report anything in relation to equipment, services and supplies provided to an employee who works from home, if they are solely used for business purposes, and private use is kept to a minimum. If the cost of additional household expenses for an employee working from home is covered by an employer, it is not necessary to report anything as long as:

  • the employee needs to work from home, because equipment that they need is not available at the workplace or their work means that they live too far away from the employer’s workplace to reasonably commute there every day
  • the amount provided is not more than their additional household expenses
  • the amount provided does not exceed the current weekly limit, which increased to £6.00 per week for tax year 2020/21.

Employers need to report costs to HMRC and deduct or pay tax and NICs on any homeworking expenses they meet that are not exempt. For equipment, services and supplies provided for both business and private use, employers must report them in P11D returns and pay class 1A NICs on the value of the benefit. Payments in excess of an employee’s additional household expenses are classed as earnings, so employers will need to establish the excess amount and add this to the employee’s other earnings, ensuring operation of PAYE (pay as you earn) income tax and class 1 NICs via the payroll.

In order to calculate the value of certain expenses, different processes apply. For equipment, services and supplies, employers must simply use the cost of providing them. If there is no supporting evidence held of the cost of an employee’s additional household expenses, then the employer must use the total cost, less £6.00 (tax year 2020/21). Where there is supporting evidence to display the level of an employee’s additional household expenses, any amount exceeding these additional expenses should be used. For salary sacrifice arrangements, where costs are below the amount of salary sacrificed, the salary amount is to be reported instead. These rules do not apply to arrangements made prior to 6 April 2017.

HMRC issued guidance (http://ow.ly/1EJk30r1ree) relevant to employees working from home due to the pandemic either because their workplace closed or where they were following advice to self-isolate. Employees who have been furloughed and are eligible for the coronavirus job retention scheme are not affected by this.

The tax and NICs treatment, and whether or not something is reportable, depends on the nature of what the item is. The following rules apply.

Where employers provide mobile phones and SIM cards, with no restriction on private use, this is non-taxable but is limited to one per employee.

If an employee already pays for their own broadband, then no additional expenses can be claimed. If a broadband internet connection is required to work from home and it was not previously available, the employer can reimburse the employee for the broadband fee and this will be non-taxable. Where the employer is reimbursing the employee for their broadband fee, private use must be limited.

Where companies provide laptops, tables, computers and office supplies, and they are for business purposes and there is not significant private use, they are non-taxable.

Where an employee needs to buy home office equipment to enable them to work from home, they must discuss this with their employer in advance. Where employees are reimbursed for the actual costs of the purchase then this is non-taxable providing there is no significant private use. If an employer does not reimburse their employee, the employee can claim tax relief for these purchases via their tax return or form P87 provided that the amount claimed is incurred wholly, exclusively and necessarily in the performance of the duties of the employment. Employees will need to retain records of any purchases and claim for the exact amount.

Any salary advances or loans intended to help employees in times of hardship count as employment-related loans. Where loans are less than £10,000 in a tax year, they are non-taxable. If they exceed this amount, then different rules apply.

Where employees are required to self-isolate but cannot do this within their own home, employers can reimburse hotel and subsistence expenses; however, this would be a taxable expense.

Where employees are using their own vehicle for business purposes, employers can pay approved mileage allowance payments of 45p per mile up to 10,000 miles and 25p per mile thereafter, without attracting any tax and NICs liabilities. Where an employer does not pay their employee mileage allowance, the employee can claim tax relief through their personal tax account.

‘Significant private use’ should not be determined on the basis of the time spent on different uses, but instead be based on the employee’s duties and the requirement for them to have the equipment or services provided in order to do their job.

Any taxable expenses or benefits provided to employees, and related to the coronavirus, could be included in an employer’s PAYE settlement agreement. This means that tax and NICs can be settled by the employer even though the responsibility would normally fall upon the employee or both the employer and the employee. It is important to note that this is only applicable to coronavirus related items.

For any employers who payroll benefits in kind, they can continue to report expenses and benefits via payroll, and through P11D returns. There is no requirement to report non-taxable expenses or benefits to HMRC via any method.

Featured in the December 2020 - January 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.