Thousands of workers could be left out of pocket under revised rules for tax relief for unreimbursed homeworking expenses.

The main changes are to disallow claims for council tax and rent, and allow a £2 per week deduction where it is not possible to calculate the additional costs incurred. The article appears in HMRC Tax Bulletin 79.

Section 336 provides relief for expenses that an employee is obliged to incur and pay wholly, exclusively and necessarily in the performance of the duties of the employment. The Employment Income Manual, at EIM32775, reduces the underlying law to two non-statutory tests:

• that the duties that the employee performs at home are substantive duties of the employment; and




• that there is an objective requirement that those duties should be carried out at the employee’s home and nowhere else.

For an expense to be deductible it must be one that the employee is obliged to incur solely because of the employment, and not because any personal reasons.
Relief can now only be allowed for:

• the additional unit costs of gas and electricity consumed while a room is being used for work,




• the metered cost of water used “in the performance of the duties” (if any),




• the unit costs of business telephone calls (including “dial up” internet access), or £2 per week if it is difficult to calculate an exact figure. This mirrors the approach given in s.316 ITEPA 2003.

The following expenses are incurred mainly for the employee’s domestic purposes and therefore do not qualify for relief. In each case the expense is a single indivisible sum (or a series of indivisible sums) no part of which is incurred “wholly and exclusively” in the performance of the employee’s duties:

• Council tax/rates (this is a change to the practice set out in EIM32815),




• Rent (this is a change to the practice set out in EIM32815),




• Water rates,




• Mortgage repayments/endowment premiums,




• Household insurance premiums.

Previously HMRC had looked at the judicial dicta in cases such as Pook v Owen (45TC571) and Taylor v Provan (49TC579). These cases were about the expenses of “home to work” travel, not the additional household expenses which result from working from home.

HMRC now believe that those cases are an unreliable guide to the approach that the Commissioners and the courts might be expected to take to the question of homeworking expenses (as distinct from travelling expenses) in the 21st century.

HMRC will accept that employees who work at home are entitled to a deduction under Section 336 ITEPA 2003 for their additional household expenses where all the following circumstances apply:

• the duties that the employee performs at home are substantive duties of the employment. “Substantive duties” are duties that an employee has to carry out and that represent all or part of the central duties of the employment (this condition is unchanged),




• 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 contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

If one or more of those conditions are not satisfied HMRC officers will contend that the employee is not entitled to relief for the expenses of working at home.

Operative date
HMRC will apply the guidance in this article to all open cases. Settled liabilities will not normally be reopened. However employees who have previously been denied relief under Section 336 for homeworking expenses, and who satisfy the conditions set out in this article, may obtain relief for “in-date” years by writing to their Tax Office.

In the absence of evidence supporting any greater amount relief will be limited to the figure of £2 per week mentioned above.

Comment
The £2 per week straight deduction is a sensible practical measure and is to be welcomed, but the changes which now no longer permit a deduction for council tax and rent do not square up with practice that has been establish as a result of case authorities over the years.

HMRC’s previous views were in Employment Income Manual EIM32815:

Council tax/rates
A room set aside exclusively for business contributes to the value of the house. Therefore a deduction can be given for a proportion of Council Tax, or the rates in Northern Ireland (but not water rates, see EIM32820).

Rent
If the property is rented the amount of the rent reflects the existence of the room that is used exclusively for business. Therefore a deduction can be permitted for a proportion of the rent paid.

These paragraphs made sense; if one has to work from home, one ensures that one has sufficient space to do so, and that may mean buying or renting a bigger house. The fact remains that there is an additional cost as a result, and that cost is wholly, exclusively and necessarily incurred for the duties of employment.

However, the case of Baird v. Williams [1999] STC 635 involved a clerk to the commissioners who tried to claim mortgage interest. He failed the wholly, necessarily, exclusively test because the interest was incurred in purchasing a capital asset which was not exclusively incurred in the performance of his duties. This case meant that mortgage interest is not a deductible expense per s.336.

TB 79 provides examples of the types of employee who is a sales rep for a Dutch company, they have no UK office and so he is required to set up and work from an office from home. Under the new interpretation he is entitled to a deduction against his employment income for the additional costs, but not for any extra rent or council tax.

This seems unduly harsh. Paying extra rent and extra council tax does not allow one to acquire any type of asset and proffers no private benefit of any description. This looks like one for the Special Commissioners to decide, unless HMRC can offer a rational explanation to this change of practice.

Nichola Ross Martin is a regular freelance contributore for AccountingWEB