We are often asked about the tax reliefs available for the costs incurred when working at home. In this and a number of future posts, I will demistify this for you and, hopefully, help save you some tax (or at least stop you falling into some nasty hidden traps).
Firstly, it is important to understand that there are different rules for
a/ employees, including directors with an employment contract
b/ directors without an employment contract (office holders)
c/ sole traders/partners
In this post, we are going to explain the rules for employees, including directors with an employment contract.
Considerations regarding Directors
However, before we do this, we need to explain why there are different rules for Directors depending on whether or not they have an employment contract.
If you are a company director you are automatically an ‘office holder’ in law. You are not entitled to receive the National Minimum Wage for the work you do as an office holder. If you also have an employment contract, you will be entitled to the National Minimum Wage for the work you do under that contract.
For the 2012/13 tax year, the main rate of National Minimum wage is £6.08 per hour. This means that a Director with an employment contract must, in law, be paid £11,856 per annum (assuming a 37.5 hour week). That is way above our recommended tax-efficient 2012/13 Directors salary of £7,600 per annum. We, therefore, usually recommend that full-time Directors do not have an employment contract (and will not be able to claim the working from home relief outlined below – but please see later article for a method of claiming releif). If a Director works 24 hours per week or less, you should consider issuing an employment contract and subject to other considerations pay a salary of £7,600 p.a. Working Tax Credit issues may also need to be considered.
Tax reliefs for employees working from home , including directors with an employment contract
Section 316A ITEPA 2003
If you are employed specifically to work at or from home, and have no alternative but to do so, you may be able to get tax relief on some of your household expenses. Similarly, if you volunteer to work at home under a ‘homeworking arrangement’. A homeworking arrangement is an agreement with your employer that you’ll work at home on a regular basis. Evidence may be required by HMRC.
Tax relief can only be obtained by your employer making these payments free of tax and NI.
You don’t have to work at home every day but there must be a regular pattern – for example two days at home and three days in your employer’s premises each week. The work you do at home must be work that you’re required to do as part of your employment.
Typically HMRC will allow claims for:
- the extra cost of gas and electricity to heat and light your work area
- business telephone calls
You won’t be able to get relief on domestic expenses that you’re paying anyway – like your mortgage or council tax. You also won’t be able to get relief for expenses that relate to both business and private use – such as your telephone line rental, or Internet access.
From 2012-13 onwards, for payments of up to £4 per week, or £18 per month for monthly paid employees, you don’t need to provide any records of the household expenses you’re claiming relief for. For amounts above £4 you will need supporting evidence to show that the amount you are claiming is no more than the additional household expenses you have actually incurred.
This type of claim is most appropriate where a spouse is employed part-time to work at home on administration. The annual tax saving for a sole trader using the uncontested £4 per week rate will be £60 (at basic rate). OK its not a lot of money, but it is simple to claim.
Section 336 ITEPA 2003
For completeness, I have included tax relief claims using the above legislation. This is the only option available to the employee where the employer does not pay a tax-free allowance.
Quoting from HMRC “Before a deduction can be permitted for a household expense it must be demonstrated that the expense has been incurred wholly, exclusively and necessarily in the performance of the duties of the employment…….. HMRC accept that those conditions are met where the following circumstances apply:
- the duties that the employee performs at home are substantive duties of the employment.
- those 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)
- at no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.”
As I said, any claim here faces some very difficult hurdles.
I really hope this helps. Please watch out for future articles and, as always, if you need further advice do not hesitate to call us.