The pandemic has resulted in more individuals working from home, with all business sizes realising they do not need everyone in the office and many reducing rented space or changing office configurations. Numerous employees have indicated that they do not wish to return to the office on a full-time basis, and employers appear to be willing to accept hybrid working arrangement.
The big question from employees will be who is covering my additional costs for me having to work from home? An employer can reimburse reasonable costs, however the normal and simplest route for the employer is to advise the employee to claim tax relief either via their self-assessment return, if they already file a return, or if employee is not in the self-assessment system, they can submit a standalone claim using a form P87.
The first point is that an employee can claim tax relief for additional household costs if they have to work at home on a regular basis, either for all or part of the week. This includes if having to work from home because of coronavirus (COVID-19).
You cannot claim tax relief if you choose to work from home.
The employee may be able to claim tax relief for:
- gas and electricity;
- metered water;
- business phone calls, including dial-up internet access.
You cannot claim for the whole bill, just the part that relates to your work.
The amount of tax relief that can be claimed is:
- £6 a week from 6 April 2020 (for previous tax years the rate is £4 a week) - you will not need to keep evidence of your extra costs, or:
- the exact amount of extra costs you have incurred above the weekly amount – you will need evidence such as receipts, bills or contracts.
You will get tax relief based on the rate at which you pay tax:
For example, if you pay the 20% basic rate of tax and claim tax relief on £6 a week, you would get £1.20 per week in tax relief (20% of £6).
A question we get asked repeatedly is in respect of building and or converting to make a dedicated home office, for example changing the garage to an office, or putting in a new outdoor building (remember David Cameron’s shepherds hut to write his memoirs).
The first point concerns whether the alteration or addition is part of the home. A house is a chargeable asset for capital gains tax purposes. Provided when the house is sold and the qualifying conditions are met, no chargeable gain will arise, as principal private residence relief (PPR) will usually be available. However, a problem can arise where part of the house has been used otherwise than as a home as HMRC may reduce the available PPR on a “just and reasonable” basis. This could result in a chargeable gain subject to capital gains tax where the reduction in the relief leaves a taxable gain, considering any evidenced costs of the alteration/addition, in excess of the available annual exempt amount (currently £12,500).
If the area is not used exclusively for work purposes, with the rest of the family having access and having use of the space, then capital gains tax does not become an issue.
However, we see the point becoming more of an issue for our business owner managers, who generally, on the advice of the builder, puts the cost of the conversion or build through their company, so they can reclaim the VAT. At this point, the cost becomes an asset of the business and will appear on the balance sheet of the business/company. Therefore, when the property is sold, part of the proceeds will need to be allocated to the business/company as the home office is its asset, which will generally lead to a tax liability. Alternatively, the business is sold, and the asset needs to be transferred from the business to personal ownership, which again is likely to result in a tax charge.
We have reported previously that HMRC are looking at home offices due to their growth in popularity, the value they add to the property, and with some businesses totally being run from the owner’s home (we have at least two clients who run their business along with their employees from converted garages).
Outside of tax, other considerations such as planning, restrictions on property use and business rates also need to be considered.
If you would like to discuss your home office working arrangements or any other tax situation, please do not hesitate to contact us.