This applies to both the self-employed and employees. Over the last few years, HMRC has given much publicity to what it sees as ‘acceptable’ claims for working from home. These amounts are quite modest but higher amounts may be claimed if they can be justified.
The rules of what can be claimed by employees are the self-employed are different. The basic difference is that for an employee to be successful in making a claim, they must ‘necessarily’ incur the cost in the performance of their duties. This is quite a difficult test to pass and HMRC enforce it quite rigorously.
A director operating through his or her personal service limited company is classed as an employee of that company and not deemed a self employed person for the purposes of what follows below.
For the self-employed, HMRC sets out a table which reaches a maximum £26 a month for someone who works from home for more than 100 hours each month. You would claim this allowance rather than an apportionment of actual expenses.
Employees can, in restricted circumstances, also be reimbursed up to (£4 per week) £18 a month tax-free if they have ’homeworking arrangements’. If the employer does not reimburse the employee's extra costs of working from home then a stand-alone tax claim can only be made where arrangements are mandatory. This allowance cannot be claimed if the employee has available facilities at the work's premises but chooses to voluntarily work from home.
Certain employments have their homeworking arrangements already agreed by HMRC e.g. university lecturers, councillors and examiners.
Whether a person is employed or self-employed, in order to claim the above mentioned tax deductible expense, that person should be performing ‘substantive duties’ from home and not just spending an hour or so on bookkeeping or making a few calls from home in the evening.
The above focuses on the ‘simplified’ rules that can be used for a quick and easy method of making a claim for use of home as an office.
There is nothing to stop you using a more detailed and more accurate method to claim for expenses incurred.
As a general rule of thumb, employees can only claim the extra costs incurred (assuming they necessarily have to work from home) whereas the self-employed can claim for a fair apportionment of home utility costs.
Checking that home is a workplace for employees
HMRC use a set of tests to determine if the home is a workplace for tax purposes for employees:
the duties that the employee performs at home are ‘substantive duties’ of the employment. Substantive duties are duties that an employee has to carry out which are all or part of the central duties of the employment. Duties which are preparatory to employment (i.e. background reading for a school teacher or journalist) are not regarded as substantive.
the substantive duties cannot be performed without the use of appropriate facilities
no such appropriate facilities are available to the employee on the employer’s premises or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect him or her to travel to those premises on a daily basis.
What can an employee claim for home as office?
The main point to note when claiming as an employee, if it is even possible under the rules, is to only claim the extra costs incurred. Possible costs to claim are:
Extra metered costs of light and heat
Business rates - if charged, not council tax
Internet access - providing not already in place
Insurance - if additional insurance is taken out
Telephone calls (not line rental)
Cleaning - if extra cleaning is required
Metered water
A homeworking employee cannot reclaim mortgage interest, rent, council tax, standing water charges or line rentals. The reason for this is that the costs are incurred anyway; whether or not the employee works from home. It is only the extra costs that can be claimed. No claims are permitted where there is a dual private use and this therefore rules out expenses such as general repairs and decorating costs. Tax relief will be given on a dedicated business items for instance a business telephone line or internet access.
Update with Covid-19 regarding employees working from home
Since the Covid-19 outbreak, most employers have followed government advice and agreed with their workforce that anyone who can work effectively from home should do so.
Homeworking arrangements means arrangements are made 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 (i.e. an employee takes work home in the evenings).
An 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 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 does not pay the full amount to an employee then the employee can claim income tax relief, at their marginal rate of tax, on the amount not paid by the employer.
Broadband
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 as extra salary.
However, 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.
Mobile phones and SIM cards (no restriction on private use)
If an employer provides a mobile phone and SIM card without a restriction on private use, limited to one per employee, this is non-taxable.
Laptops, tablets, computers, and office supplies
If these are mainly used for business purposes and not significant private use, these are non-taxable
Additional expenses like electricity, heating or broadband
Payment or reimbursement to employees of up £6 a week, from 6 April 2020, is not a taxable amount for the additional household expenses incurred when an employee is working from home.
If the claim is above this amount, an employee will need to keep receipts and demonstrate to HMRC the actually additional costs if they wish to claim tax relief on the extra amounts spent working from home.
Employees using their own vehicle for business
Employer can pay approved mileage allowance payments of 45p per mile up to 10,000 miles (25p per mile thereafter) free of tax and National Insurance contributions for business travel. Travel from home to a regular workplace or workplaces is defined as private travel.
HMRC has published guidance for employers to Check which expenses are taxable if your employee works from home due to coronavirus (COVID-19)
What can the self-employed claim for home as office?
Unlike employees, the self-employed can claim a proportion of all home utility and running costs. There is no requirement for the costs to have been specifically incurred as a direct result of working from home.
The general tax rule is that an expense is only allowable as a deduction for self-employed purposes if it is incurred ‘wholly and exclusively for the purposes of the business’.
Wholly and exclusively does not mean that:
business expenditure must be separately billed, or
part of the home must be permanently used for business purposes and not used for any other purpose at any other time.
Wholly and exclusively does mean that when part of the home is being used for the business then that is the sole use for that part at that time.
The types of costs that may be considered are a proportionate claim for the following:-
• Light and heat
• Telephone
• Rent
• Council tax
• Mortgage interest
• Home insurance
• Broadband costs
• Cleaning
• Re-decoration and repairs
In many cases there is more than one method of arriving at a reasonable apportionment, although some methods may be more appropriate for a particular type of expense.
In general, fixed costs relating to the home can normally be apportioned based on area and time; these would include insurance, council tax, mortgage interest, rent, repairs and maintenance.
A business may use an electric heater during the day to keep a single room warm. This could be in preference to warming the whole house using gas central heating. They should claim for the estimated cost of the electric used. It would be unfair to claim a proportion of the gas central heating as this is not used during the day for business.
Telephone costs for business calls are allowable. A proportion of the line rental (based on the ratio of business use to total use) may be claimed. Some packages are all inclusive of telephone, broadband and possibly television in which case a reasonable apportionment should be allowable for the business use of telephone and broadband; in most cases the costs relating to the television will not be allowable.
Broadband and internet costs are allowable to the extent that the service will be used for business purposes. An apportionment similar to the telephone usage basis should be used.
Cleaning should be apportioned based on the facts. For example a business may ask the cleaner not to clean the office area of their home in which case none of the costs would be allowable. Alternatively, the business may require specific cleaning requirements, e.g. in a commonly used meeting or working area, in which case a higher proportion of the costs may be claimed, if justifiable.
Repairs and maintenance that relate solely to part of the house that is not used for the business are not allowable. If you do not decorate the room that you are using for the business, it would be unfair to claim a proportion of the redecoration costs of other rooms in the house. Although, if a room is used solely for business purposes, then the cost of redecorating that room could be wholly allowable. General repairs and maintenance (such as repairs to the roof) could be apportioned on an area and time basis.
An example
If annual household gas and electric cost was £2,500 pa and one room was used for business that made up 20% of the total house floor area then £500 of costs could be allocated to the home office space. If the room was used for say 10% of the time for the children to play after work and time for private internet use then the business cost to claim would be reduce to £450 pa.
The above is a simple example. The household heating may only come on in the morning and evening and not therefore be used during normal office hours. The person may only heat the room used for business during the day and similarly only use electricity in their office room. They may use the kitchen to make occasional drinks throughout the day and their only other water use may be to flush the toilet.
In conclusion
There are no fixed rules that the self-employed should adopt. They should use a fair method of apportionment to reflect the cost of services used. This permits the self-employed to claim for services that are already being incurred privately e.g. a broadband connection. This applies if the service is partly used for business. Apportionment of fixed costs, that will be incurred whether or not the person works from home or not, is not available for employees. The latter can only claim for the strict extra costs incurred as a direct result of working from home.
Telecommunication and similar costs - Getting the contract right
This section applies to employees and also the director-shareholder working for their own personal service company from home.
Most people that work from home will have their telephone and broadband contract in their personal name and therefore there will generally be no extra cost of using it for business and therefore nothing can be claimed as a business cost.
They cannot claim for the telephone line rental. They can only claim for the extra metered business telephone calls. If they have a free allowance for calls in their telephone contract and do not exceed that allowance then again there is no extra cost incurred and therefore nothing can be claimed for tax.
If an employee moved to a new house and therefore had no existing broadband contract or the employee’s existing home broadband was slow or poor quality and they decided for business reasons to upgrade to high speed broadband then in both cases they may consider taking out the broadband contact in the name of the business e.g. their personal limited company.
They would then be able to claim all of the fixed monthly broadband costs as a business expense. In the latter case there is no extra cost of using the broadband for private household purposes and therefore no benefit in kind would arise for private use.
If the contract for the broadband is changed into the name of the company then there is an argument for then claiming the whole cost as a business expense. This can however create other issues. H M Revenue & Customs may argue that the employee is just trying to claim a tax deductible expense for what is effectively their household broadband and which is a private cost. A taxable benefit in kind may therefore arise on the whole cost incurred. This would therefore reverse the business tax saving and could also create a National Insurance cost.