The coronavirus pandemic is expected to have a long-term impact on working arrangements, with many employees working remotely for the foreseeable future.
As a result, employers need to consider tax implications for employee expenses and benefits. While there are currently no special concessions to the rules due to COVID-19, there are several factors to be aware of when employees are working from home.
Provision of living accommodation during coronavirus
If you provide living accommodation to employees, this can be treated as a taxable benefit, subject to exceptions stated below.
Job-related accommodation is subject to tax relief. This applies in cases where:
- This is necessary for the proper performance of the employee’s duties
- The kind of employment means it is customary for employers to provide accommodation
- The accommodation is in place for the employee’s security
Living accommodation provided to employees in order for them to work at a temporary workplace can also qualify for tax relief. This broadly applies to secondments. To be eligible, the duration should be expected to last for a period of no more than 24 months. Any period of furlough will count as part of the relevant period, with the tax relief ceasing as soon as it is clear that the 24-month limit will be breached.
Home working expenses
Payments made by employers to cover an employee’s living costs, such as rent and utility bills, is by default a taxable benefit or taxable as earnings.
However, if the employee can evidence the additional utility bills as a result of working from home, the difference can be reimbursed tax-free, if the employer wishes to action. If the employee does not keep detailed records, a flat amount of £6 a week (from 6 April 2020) can be reimbursed for additional household expenses as a non-taxable payment.
Home office equipment
If your employee needs to buy home office equipment to allow them to work from home, they will need to discuss this with you in advance. Any equipment provided to employees, such as laptops, tablets, computers, and office supplies, are non-taxable providing there is not significant private use (which is widely defined and should be considered beforehand).
Mobile phones and SIM cards
If an employer purchases a mobile phone and SIM card for an employee, this is non-taxable even without a restriction on private use. This is limited to one per employee and must be purchased in the company’s name.
Other benefits and expenses
Salary advances or loans
A salary advance or loan (used to help your employees at a time of hardship) counts as an employment-related loan. Loans provided with a value less than £10,000 in a tax year are non-taxable.
Reimbursements on business mileage on a company car should not be subject to a tax if they are paid up to the Advisory Fuel Rates (AFR). Reimbursements for business mileage on a private car are tax free up to the limits of 45p per mile for the first 10,000 miles per tax year and 25p per mile thereafter.
Fuel reimbursements for private mileage, even if this was for example volunteering during the COVID-19 pandemic, would be subject to income tax and national insurance.
Refunds on ordinary transport costs are considered to be a benefit, because journeys between an employee’s workplace and home are private journeys. There are some exceptions (such as late working). Although these tend to be quite specific, they may include some costs of reimbursing travel costs where car-sharing arrangements are stopped due to COVID-19.
Company cars provided to employees will be considered to remain taxable benefits even if the employee is on furlough and/or is instructed not to use the car.
Tax treatment of expenses and benefits
If payments are to be treated as a taxable benefit
The payment will be subject to income tax and Class 1A National Insurance, as long as the payment is invoiced and settled by the employer, and providing the assets are not cash convertible. Reporting can be made on a P11D form or a PAYE Settlement Agreement (PSA) depending if the employer wishes to settle the employee’s tax liability.
If benefits are cash convertible
For cash convertible benefits, such as a reimbursement for private fuel (above the AFR), PAYE will need to be applied through the monthly payroll submission.
If the payment is a qualifying expense and is not reimbursed by the employer
The employee can claim tax relief for these purchases on their tax return or a P87 form. Any reimbursements for business expenses are not reportable.
Amendments to salary sacrifice arrangements
If a salary sacrifice arrangement is amended or created between an employer and employee because of coronavirus, you must ensure the changes are reflected in the terms and conditions of the employment. The rules on salary sacrifice are unchanged due to COVID-19.
Reclaiming VAT on home office equipment
If you are looking to recover VAT on home office equipment purchased for employees (e.g. desks, chairs, laptops) this needs to be looked at on a case-by-case basis, as this can be tricky.
Before any VAT recovery is considered, you need to ensure there is sufficient evidence of the VAT incurred. If you wish to claim all or some of the VAT, and the cost is in excess of £250, a proper VAT invoice should be issued by the supplier and be in the employer’s name.
VAT recovery will also depend on the item in question and its intended use. The following questions should be considered:
- Is the item free standing furniture or something that will be incorporated into the employee’s home?
- Will there be any private use?
- Does the employee have to return the item at any point in the future to the employer?
The rules differ if a business owner incurs the cost (i.e. a partner or sole proprietor), where VAT may be recoverable in full.
How can we help?
Our Tax Department has extensive experience in supporting businesses with their employment tax queries. If you are looking for assistance, please contact David Portman (firstname.lastname@example.org) or Phil Moss (email@example.com).
Similarly our VAT Director, Jaspal Dhillon (JaspalDhillon@lubbockfine.co.uk) is well-placed to assist with any VAT issues.