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As much of the UK has headed deep into lockdown due to coronavirus, many are getting used to the trials and tribulations of working from home or remote working. Recently the government announced a much criticised £10,000 home working allowance for MPs. But what of the average person working from home? Can they access any tax breaks? In this article we discuss the general tax reliefs available when working from home.
Note: this article is intended for general guidance only and does not constitute accountancy, tax or other professional advice. We recommend you seek specific advice based on your circumstances.
Different rules apply depending on whether you are an employee or self-employed or a company director when claiming tax relief against income or profits for the costs of using your home for business purposes. As such the tax breaks can be broadly split into three:
- Employee homeworkers
- Self-employed traders, Partners and Landlords
- Company Directors
The general rule for employee homeworkers is that they may claim expenses only if incurred wholly, exclusively and necessarily in performance of their employment duties. This generally excludes expenses which are part-business/part-private.
Where home working is undertaken by personal preference no claim is possible, however as most employees are home working due to government guidelines meeting this criterion should not be a problem.
Type of expenses
Claims for tax relief will be limited to metered use of light and heat and itemised telephone calls. Claims for other costs may be possible depending on the nature of the employment.
Instead of claiming actual expenses there is an HMRC approved allowances that can be claimed. This is at a fixed rate of £6 per week or as agreed by the employer via a dispensation agreement with HMRC.
How to claim
For those not completing tax returns, normally the costs incurred for working at home should be re-imbursed by your employer. If this is not available, then HMRC allow for employees to claim direct via their online portal.
To claim these expenses, you need a Government Gateway user ID and password. You can create a user ID if you do not already have one. For this you would need:
- your National Insurance number
- a recent payslip or P60 or a valid UK passport.
Tips and pitfalls
If an employer reimburses an employee’s expenses under a home-working agreement there will be no tax liability for the employee provided that the expenses qualify for relief under the general rule. This strategy is more beneficial for the employee because the employer bears all the costs.
Self-employed traders, Landlords and Partners
As a general rule working from home means you can claim part of your household costs for tax purposes as long as the expenses is incurred wholly and exclusively for the purposes of the trade. This is the case even if you have an office or other business premises.
What expenses can be claimed?
As self-employed person working from home you are entitled to claim a proportion of most household costs, including but not limited to:
- Mortgage interest or rent
- Council tax
- Water rates
- Repairs and maintenance
- Building and contents insurance
- Gas, oil or other heating costs
Claims should be based on the proportionate use of the property for the business. This comes down to how much time is used and how much space is used, i.e. how much space is set aside for business use and how much time is spent on business. Given the current coronavirus lockdown it is likely that the time element will be greater than usual.
A proportion of general repairs and maintenance costs relating to the whole property, such as roof repairs or gas maintenance costs may be claimed. Costs which are specific to an area used for work may be claimed in full – subject to any reduction required for partial private use of that area.
Redecorating a study used for work would be an allowable cost, for example. The flipside of this is that any costs specific to a wholly non-work area may not be claimed at all.
Any furniture and equipment used for business can claimed 100% thanks to something called an annual investment allowance, although this is subject to a reduction for any private use.
How to calculate the business proportion?
HMRC do not provide any hard and fast rules here, the overriding factor that it is reasonable and justifiable.
As such, there are many possible methods for calculating the business proportion. Generally, in practice, the most popular method is to simply take the number of rooms used for business as a proportion of the total number of rooms in the house. Hallways, bathrooms and kitchens should be excluded from the calculation. So, for example if you use one room in your house as your office and the house also has two bedrooms, a living room, a dining room, two bathrooms and a kitchen then for the purposes of our calculation you can claim one fifth of the household costs (you ignore the bathrooms and the kitchen). Note that you would need pro-rata this for the tax year on a time spent basis. (see below).
Some calculations may benefit from using floor space instead of rooms. If the business requires a lot of space and the room used is actually the largest in the house, then it would be better if the calculation was done based on floor space rather than rooms, as this would normally produce a greater deduction.
For smaller properties, calculating the business proportion based on floor space or number of rooms may not be suitable, instead it will often make more sense to make claims on a time basis instead. For example, someone working from home with a one bedroom flat it would be difficult to proportion things on a space used basis, as effectively the whole flat will either be used privately or for business. Hence in this scenario the argument is that there is “work”, “rest” and “play” taking place at any given time, accordingly claiming a third of the household costs would be arguably justifiable.
Part time workers
Similarly, part time workers would need to apply a further adjustment to take account of the fact that less time is spent at home working. Establishing this reduction needs to be considered on a case by case basis. The key watchword to remember is that the calculation has to be reasonable.
Protecting your Capital Gains Tax exemption
Using a room solely for business purposes may affect any capital gains tax (CGT) exemptions you could be eligible for on the sale of your home. This exemption, which you usually get when you sell your home, is restricted if part of the house has been used exclusively for business. Fortunately, as long as there is private use of each room in the house, no matter how small, your CGT relief is safe. This does mean that your home as office claim has to be restricted, but experience shows that on average the trade-off is worth the potential tax savings made on sale.
Flat Rate Deductions
Like employees HMRC have provided trading businesses a system of flat rate deductions for business use of your home.
The flat rate deductions are an alternative method available instead of the proportionate calculation methods discussed above. The amount of the deduction is calculated on a monthly basis according to the number of hours spent wholly and exclusively working on business matters. The rates applying start from £10 per month rising to £26 per month for 25 to 101 working hours respectively. Experience suggests you would almost certainly be better off carrying out a proper calculation and claiming a suitable proportion of the actual household running costs direct.
Although it is worth noting that the flat rate does not include telephone or internet expenses. The taxpayer can still claim the business proportion of these costs by working out the actual costs.
Directors and other employees may only claim the specific additional costs of working from home. Where it is impractical to calculate the exact costs, HMRC permit a claim of £6 per week.
The calculation methods outlined above for sole traders can also be applied here.
Type of expenses
As with employees, claims are limited to metered use of light and heat and itemised telephone calls. Claims for other costs may be possible depending on the nature of the employment on a reasonable and justifiable basis.
Requirement to work from home
HMRC stipulate that the director must also be required to work from home: simply choosing to do so is generally not sufficient. If you run your company from home and have no other business premises, then this is pretty straightforward. In other cases, there will be a requirement to demonstrate a genuine need to carry out your duties at home and there may also be a need to stipulate this requirement to do so in the employment contract.
However, due to the current COVID-19 lockdown, it is clear that many company directors are required to work from home under Government guidelines. Hence, at present, it is arguable that there is no need for this to be included in an employment contract and most small company directors should be able to claim a deduction for working from home – either at £6 per week or a greater amount if detailed calculations support it. As above, long-term exclusive business use of one part of the property should be avoided so as not to affect the CGT exemption on sale of the home.
In order to get tax relief, extra salary over and above the personal allowance will be required. This will lead to additional National Insurance costs. However, this extra tax liability can potentially be avoided, if the company reimburses the director’s expenses under a homeworking agreement provided of course that the expenses qualify for relief under the general rule.
Licence to occupy?
A better solution in many cases maybe for the company director to enter into a “licence to occupy” agreement with the company for “non-exclusive” use of an office space in the director’s house, i.e. an appropriate agreement to rent space in your home to the company. A suitable proportion of all household costs can then be deducted from the rent received and no National Insurance will be due. Additionally, the company will also be able to claim Corporation Tax relief for the rent paid. Furthermore, by granting the company a ‘non-exclusive licence to occupy’ the relevant space, and maintaining some private use outside working hours, any restriction in CGT relief on your home can be avoided.
If you need help with this or any financial or tax issue please call us on 0114 272 4984 or email email@example.com – we are ready to help.
Coronavirus Job Retention Claim portal is now live
Employers and their agents wishing to make a claim under the Coronavirus Job Retention Scheme can now do so as the claim facility is now open.
To make a claim, employers (or their agents) will need to be registered for PAYE Online. Employers must also have a UK bank account into which the claim money will be paid.
The following must also be provided:
- employer PAYE reference;
- the number of employees being furloughed;
- for each furloughed employee, their National Insurance number;
- the start and end date of the claim;
- the full amount being claimed (including associated employer’s National Insurance contributions and minimum employer pension contributions);
- phone number, employer’s name and a contact name;
- the employer’s corporation tax or self-assessment unique tax reference or company registration number.
A claim can be made by an agent who is authorised to act for the employer for PAYE purposes, but not by an agent who is only authorised to file on behalf of the employer.
Claims can be made online at www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme.
HMRC will check claims and employers should receive the money into their accounts within six days. Where the money is needed to pay the April 2020 payroll, claims should be made without delay.
Claims can be made for furloughed employees who were on the payroll on 19 March 2020 and in respect of whom an RTI submission had been made to HMRC by that date. A claim can be made for 80% of the employee’s wages (capped at £2,500 per month), plus the associated employer’s National Insurance and minimum pension contributions. Claims can also be made for employees who were made redundant or stopped working for the employer on or after 28 February 2020 and who are put back on the payroll after that date. The minimum furlough period is three weeks, and furloughed employees cannot work for the employer while furloughed.
For full time or part-time employees, the claim is based on their normal salary. Where an employee’s pay varies, the claim can either be based on their earnings for the same pay period in the previous year or on their average earnings for 2019/20.
The CJRS portal is effectively “self-serve” which means clients will need a lot of hand-holding and help from their accountants/advisers.
In general the portal works as follows:
- Claims will not be made by phone, it will be an online service.
- File only agents, including Payroll Bureaus, will not be able access the service due to data protection reasons.
- Businesses will need the above information on each of their furloughed employees:
- the service is designed to be self-serve with guidance in place.
Whilst the most basic CJRS claims can perhaps be processed by employers, we fully expect most employers to require help from their advisers to hand-hold them through the process.
As such we understand that these are troubling and uncertain times for you and your organisation. The team here at Shipleys Tax are here to answer your questions. We will support you through the difficult times and help you make the right decisions.
If you need help with any financial or tax issues relating to COVID-19 please call us on 0114 272 4984 or email firstname.lastname@example.org.
*****UPDATED 6 APRIL 2020****
As anticipated, HMRC guidance has been updated to confirm that Directors can be furloughed provided they do not do any work for, or generate any revenue for the organisation.
However, whilst the guidance says that they can still fulfil their statutory duties, it does not go into any detail about what HMRC will regard as a statutory duty for this purpose.
We anticipate that HMRC will expect to see a record of a formal board resolution having been made confirming the decision to furlough specific directors if your organisation was ever questioned. Minutes from any relevant board meeting should therefore be made and retained.
Previously the Cabinet Office confirmed that the Coronavirus Job Retention Scheme (CJRS) will also apply to off-payroll contractors working for public sector organisations, including those working through a personal service company (PSC).
This means that the CJRS can now be offered to those individuals:
- working through a personal service company,
- for a private organisation or public sector client,
- where the worker is unable to carry on working due to the COVID-19 pandemic.
The Coronavirus Job Retention Scheme has brought much relief for many businesses and employees. For others, like one man band companies it has brought much uncertainty. Initially the guidance was unclear as to whether a sole director could claim furlough, however the Government has confirmed “furlough” will be available to sole director companies (under certain conditions) and has published updated guidance.
What is the Coronavirus Job Retention Scheme?
The Coronavirus Job Retention Scheme is a temporary scheme open to all UK employers for at least three months starting from 1 March 2020. Under the scheme Employers can use a portal to claim for 80% of furloughed employees’ (employees on a leave of absence) usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that wage. Employers can use this scheme anytime during this period.
The scheme is open to all UK employers that had created and started a PAYE payroll scheme on 28 February 2020. For further details please see:
HMRC guidance is constantly changing, so we recommend you monitor the links above regularly. We also recommend seeking professional advice before taking any action.
The general rule is that once the employee is on furlough they will not be able to work but they can undertake training or volunteer subject to public health guidance, as long as they’re not:
· making money for their company/employer
· providing services to their company/employer
The issue with sole directors
Most sole directors are paid as “office holders” (at less than the minimum wage) and not a Director, topped up by dividends up to the 40% rate band. If they were an employee then they would need to write to themselves to put themselves on furlough. This would leave the company without anyone working in it and give rise to wider company law issues. For example, does this qualify as a business? Wouldn’t a director be trying to generate new work or get new contracts, deal with invoices/receipts etc? Or make plans for when the crisis is over?
HMRC has eased some confusion and confirmed salaried company directors are eligible to be furloughed and receive support through the job retention scheme as office holders. Although company directors owe duties to their company which are set out in the Companies Act 2006, they furlough themselves provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.
Furloughed directors as employees on can only claim on their PAYE element, even if they are the sole employee. Basic conditions are as follows:
- they can qualify as normal under CJRS
- they must not provide any services that is income generating
- can continue to perform their statutory obligations as directors/office holders e.g. official legal filings, Company secretarial etc
- only the PAYE element can be furloughed – not dividends
How can furlough for directors be achieved?
HMRC state that where a company (acting via its “board of directors”) considers that it is in compliance with the statutory duties of one or more of its individual salaried directors, it can decide that such directors should be furloughed. The decision should be formally adopted as a decision of the company, noted in the company records and communicated in writing to the director(s) concerned. For sole directors, this effectively means
- record of a formal board resolution having been made confirming the decision to furlough specific directors
- minutes from any relevant board meeting should therefore be made and retained.
- email to your accountant notifying of the same.
What to do now?
The new HMRC portal to make an application for the Job Retention Scheme will not be available until mid to late April. Our advice would be to wait until then and look to claim furlough once the rules are fully clarified as you are able to backdate the furlough notice.
If you need help with the tax implications of the above please call us on 0114 272 4984 or email email@example.com.