Reimbursement of home office costs

HMRC has announced that employees who are working from home due to COVID-19 will be able to benefit from a temporary exemption for employer reimbursed expenses that cover the cost of home office equipment. The exemption will ensure that employees are not taxed on the reimbursement they receive from their employer with effect from 11 June 2020 until the end of the tax year 2020/21. However, HMRC will exercise its collection and management discretion and not collect tax and NICs due on any reimbursed payments made from 16 March 2020 (the date the government recommended working from home) until the regulations take effect.

The new provisions are set out in The Income Tax (Exemption for Coronavirus Related Home Office Expenses) Regulations 2020 and follow on from a statement to the House of Commons made by Jesse Norman, Financial Secretary to the Treasury, setting out the government’s intention.

Background

Where an employer requires an employee to work from home, the employee can claim a tax deduction for increased costs due to working from home, such as heating and electricity. Whilst apportioning the actual costs between personal and employment may be difficult, HMRC allow employees to claim a fixed rate allowance of up to £6 per week (increased in the March 2020 Budget). Alternatively, an employer may pay up to £6 per week as a home working allowance on a tax free basis. Where an employee wishes to claim more than £6 per week in expenses then it would be necessary to show that those expenses are incurred ‘wholly, exclusively and necessarily in the performance of the duties of their employment’ and provide evidence for the increased amount.

In relation to home office equipment, ITEPA 2003 s.316 provides a tax exemption but it only applies where an employer provides home office equipment directly and retains ownership of that equipment, and the employee’s private use is not significant. In addition, this exemption does not extend to employer reimbursements for employee expenditure on home- office equipment. Where an employee buys their own home office equipment and is reimbursed the cost by their employer, HMRC take the view that this expense is not incurred “wholly, exclusively and necessarily in the performance of the duties” but rather the expense incurred puts the employee in a position to perform their duties and is therefore not incurred in performance of their duties.

New measure

As a new and temporary measure, the government has now announced that it is introducing an income tax and NICs exemption for employer reimbursed expenses to cover the cost of qualifying home office equipment. This measure is designed to minimise the burdens on employers and employees who are required to work from home due to COVID-19.

The new exemption is introduced under ITEPA 2003 s.210 (power to exempt minor benefits) (and equivalent NICs provisions) to ensure employer reimbursements for the cost of home office equipment expenses are exempt from tax and NICs and is contained in The Income Tax (Exemption for Coronavirus Related Home Office Expenses) Regulations 2020.

For the expenditure to be eligible for relief, it must meet the following two conditions:

• the equipment is 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 under ITEPA 2003 s.316 of ITEPA if it had been provided directly to the employee by or on behalf of the employer.

The type of home office equipment necessary for the employee to work from home as a result of COVID-19 is expected to include items such as laptops, desks and necessary computer accessories.

The exemption will be conditional on the benefit of any reimbursement in respect of home office equipment expenses being made available to all of an employer’s employees generally on similar terms.

Comment

This is clearly a welcome easement in the circumstances of the COVID-19 pandemic when so many people are required to work from home. Accordingly, it is to be hoped that, in the circumstances, HMRC do not seek to apply a stringent test to the significance of any private use of home working equipment. HMRC’s policy is generally set out in its Employment Income Manual at EIM21613. This includes the example of the provision of a laptop where HMRC accept that where a computer is provided by an employer because it is necessary for an employee to be able to carry out the duties of the employment at home, it is highly unlikely that any private use made of that equipment will be significant when compared with the business need for providing the computer in the first place.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.