Working from home and the law of unintended consequences

As if home schooling and balancing Amazon deliveries is not enough, working from home can have tax consequences. Many people are expecting that home working is likely to become more regular and – indeed sometimes –permanent, so it is worth a few moments to think about the main issues.

Key considerations for employers and employees

When working from home there are two principal matters to consider: income tax and capital gains tax.

Income tax

Looking at income tax first, many employers are making payments to compensate for additional expenses such as heat and light etc and/or providing equipment to enable their staff to work from home. There is a small amount of £6 per week, which can be paid tax free, but above this the employee will need to demonstrate that there is a deductible expense (which is not always easy). For equipment, it is wise to be clear about whether equipment is loaned or given plus who is insuring it.

Employees will need to know whether the provisions (cash or kind) are ‘wholly necessarily and exclusively’ for the performance of their duties. Is there a more discretionary element of desirability rather than necessity and how is non-business use prevented? Although individual sums paid might be small, across a whole staff base the numbers might be more significant and HMRC can and will check for correct PAYE deductions and correct P11ds.

It is now possible for employees to claim tax relief for the whole year if they have been required to work from home for just one day since 6 April 2020. HMRC has revamped the system to simplify the process, in recognition of this year being very different.

Is your home becoming your main place of work?

The second area is much more relevant for the employee themselves, but employers might want to ensure employees are aware of what they are doing vis a vis main residence relief for capital gains tax, so there is no question of any comeback.

An individual’s main home is generally exempt from capital gains tax, but only if the property is used as a residence. Any business use of the property may start to limit that relief, especially where a room is used exclusively for work. Working at the kitchen table or even a dedicated ‘study’ is unlikely to prejudice the relief provided the room is generally available to the household and used for non- work purposes as well. By contrast, the building or use of a room solely for business or work – perhaps a treatment room for a beauty business, or a workshop of some type – could lead to a portion of the gain being taxable on a future sale.

It is not possible to cover many examples in an article of this type, but it is worth thinking about the point and whether you or your staff could be affected. This is particularly true since any taxable disposal of a property must be reported to HMRC and any tax due paid within 30 days of the sale, so we do suggest the matter is checked if there is any doubt.

Get in touch

Please get in contact if any of these issues affect you or your employees. We are here to help and advise so that you avoid any unwelcome tax demands from HMRC.