It's Official - Tax Bulletin

Some extracts from HMRC's 79th Tax Bulletin.

Employees who work at home

In Tax Bulletin 79, HMRC have published guidance on employees who work at home and their entitlement to tax relief for unreimbursed homeworking expenses under ITEPA 2003, s 336. The guidance supersedes that in the Employment Income Manual at EIM32760 et seq, which will be substantially re-written and:

• examines the circumstances in which employees who work from home are entitled to a deduction under ITEPA 2003, s 336 for a proportion of their household expenses;
• sets out the criteria which HMRC will apply in deciding if such a deduction is due; and
•  provides examples of circumstances when relief will and will not be due.

The guidance also explains how the amount of the deduction will be calculated. It does not affect the tax treatment of payments which employers may make to employees who work at home under agreed homeworking arrangements under ITEPA 2003, s 316A, nor the deduction of expenses for trading income purposes (see Business Income Manual at BIM37600 and BIM46840).
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 courts have consistently held that this is an objective test — see for example the speech of Lord Blanesburgh in Ricketts v Colquhoun (10 TC 118 at page 135). For an expense to be deductible under s 336 it must be one that the employee is obliged to incur solely because he holds the employment, and not because of any reasons personal to him or herself. Thus any element of personal choice as to whether the employee works at home or at the employer's premises will prevent a deduction under
s 336 for those employees who choose to work from home.
HMRC now believes that the tests in the Employment Income Manual at EIM32775 based on 'home to work' travel 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 in the twenty-first century. Homeworking expenses are different from travelling expenses because the precise place where an employee lives is, usually, a matter of personal choice. It follows that the expenses of travelling to and from the employee's home are a direct consequence of that personal choice. However, if an employee has a job the duties of which do objectively require him or her to work away from the employer's premises, the resulting expenses (ignoring travelling expenses) are likely to be much the same irrespective of where the employee happens to live.
Consequently, HMRC will accept that employees who work at home are entitled to a deduction under s 336 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 is not satisfied, HMRC officers will contend — subject to the employee's right of appeal — that the employee is not entitled to relief for the expenses of working at home.
It is a condition for relief under s 336 that the expenses must be incurred 'wholly and exclusively' 'in the performance of' the employee's duties. In practice that means that relief can 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); and the unit costs of business telephone calls (including 'dial up' Internet access).
Expenses that are incurred mainly for the employee's domestic purposes, e.g. council tax, rent, water rates, mortgage repayment and household insurance will not qualify for relief.
HMRC appreciate that it may be difficult for employees to calculate the exact amount of the allowable additional costs that they have incurred as a result of working at home and will therefore accept that employees who satisfy the conditions for relief are entitled to a deduction of £2 (exclusive of the cost of business telephone calls) for each week that they are required to work at home, without having to justify that figure. Employees who wish to deduct more will be expected to keep records and to be able to show how their figure has been calculated. Exempt 'homeworking' payments from an employer must be deducted from any amounts claimed under s 336. 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 s 336 for homeworking expenses, and who satisfy the conditions, may obtain relief for 'in-date' years by writing to their tax office.
The Bulletin includes twelve examples of circumstances where relief under s 336 would and would not be given.

Employees from abroad

Tax Bulletin 79 includes guidance on employees sent from abroad to work in the UK and how time apportionment applies to their earnings for Class 1 NIC purposes. Tax Bulletins 59 and 63 and Statement of Practice 5/84 explained how to compute 'non-UK workdays' for tax. Legislative differences between tax and NIC treatment of duties overseas mean that the SP 5/84 practice for computing 'non-UK workdays' for tax has no direct relevance for Class 1 NIC.
There are certain fairly unusual circumstances where earnings are to be apportioned on a daily basis between UK and non-UK employment for NIC. The Tax Bulletin article looks at where this can arise and sets out HMRC's practice for computing the resulting apportionment.
The Bulletin looks at a scenario where apportionment is appropriate, but some employers will have operated NIC on the whole salary and refunds may be due.
This scenario arises where the employee is not covered by the EC Treaty and EC Regulations 1408/71, by bi-lateral social security agreements, Regulation 145(1) or Regulation 146 of the Social Security (Contributions) Regulations 2001 (SSCR 2001) and where the employee is:

• not ordinarily resident in the UK;
• works in the UK under contract to their foreign employer; and
• returns overseas to perform duties overseas for the purposes of that foreign employer; and
• is paid a salary in respect of their UK employment and their employment with the sending employer; and
• it can be shown that the employment costs were met by the overseas employer and therefore for the purposes of that foreign business.

Where these criteria are met, the salary in respect of the days working overseas for the foreign employer can be excluded from the computation of earnings for NIC purposes. The practice for computing Class 1A NIC on certain taxable benefits does closely follow the apportionment method used for tax following SP 5/84 and is dealt with in a separate article in Tax Bulletin 79.

The tax position

An employee resident but not ordinarily resident in the UK is liable to UK tax under ITEPA 2003, s 25 in respect of duties performed in the UK. Such employees are also liable under ITEPA 2003, s 26 on emoluments for duties performed outside the UK, but only to the extent that the emoluments are received in the UK. Where the duties of a single office or employment are performed both in and outside the UK, an apportionment is required to determine how much is attributable to UK duties and how much is attributable to foreign duties.

The NIC position

In social security law, it may harm the future benefit entitlement of employees if they fragment their contribution record by paying to the schemes of several countries, so the rules are designed to minimise gaps on their UK contribution record. When a person leaves the UK to work overseas, there is no liability for Class 1 NICs on the earnings paid in respect of that employment unless:

• EC Regulations or a bi-lateral agreement applies to keep the person in the UK scheme; or
• Regulation 146, SSCR 2001 applies to keep the person in the UK scheme; or
• the special rules for certain groups such as mariners, aircrew and continental shelf workers apply; or
• the trip overseas is merely a temporary absence from the UK-based employment.

For NIC purposes the world can be usefully divided into:

• The European Economic Area (EEA). EC Treaty and EC Regulation 1408/71 applies to employees moving between EEA Member States to work. It modifies SSCBA 1992 and regulations.
• Reciprocal Agreement (RA)/Double Contribution Convention (DCC) Countries. Bi-lateral social security agreements modify SSCBA 1992 and regulations.
• The rest of the world. SSCBA 1992 and contributions regulations are unmodified.

Tax Bulletin 79 includes a list of which countries are EEA, RA or DCC countries at the end of the article.

EC Regulations, RAs or DCCs

The UK has a series of agreements with other countries to protect the interest of the employee by ensuring that when they work overseas, they do not fragment their social security record or pay contributions twice on the same earnings. EC Regulations and most RAs and DCCs contain special rules for those who move between countries to work and normally work in more than one country. The agreements determine which state's legislation will apply, and thus to which country contributions should be paid.
If under the terms of the EC Regulations, an RA or DCC, a person remains in the UK's social security scheme when working abroad, he will pay NIC on all of his earnings from the employment — without the need to apportion.
More information on the EC Regulations, RAs and DCCs is on the HMRC website at www.hmrc.gov.uk/cnr/index.htm.

The rest of the world

Where EC Regulations, RAs or DCCs do not apply, Tax Bulletin 79 explains that there is no liability to pay UK Class 1 NIC unless there is employed earner's employment (or employment treated as employed earner's employment) here in the UK.
Tax Bulletin 79 goes on to explain Regulations 145(1), 145(2) and 146 SSCR 2001 and provides two examples of the rules in practice, with alternative scenarios. It explains the records that should be kept and how repayment claims made in the terms set out above can be sent directly to NICO, Refunds Multi Erroneous, BP1001, Benton Park View, Longbenton, Newcastle Upon Tyne, NE98 1ZZ.         
The foregoing are extracts from longer articles in Tax Bulletin 79 to which reference should be made for details of the full text. Tax Bulletin is covered by Crown copyright and is available on the Internet at www.hmrc.gov.uk/bulletins/tb79.pdf.

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