Return to the office: Episode 3 - Tax in a post-pandemic workplace

Anna Fletcher: Hello, I am Anna Fletcher a legal director in Gowling WLG's Employment Labour and Equalities team and today I am delighted to be joined by my colleague Zoe Fatchen, a partner in our Corporate Finance and Tax team and a real tax expert. Zoe is going to talk to me about some of the issues that we have seen raised by clients and issues which might be interesting to those of you listening in relation to tax and the new ways of working that we expect to see develop post-pandemic.

Zoe Fatchen: Thanks very much Anna, I am very happy to be here this morning to talk to you about this very topical subject.

Anna: Zoe, what are the sort of overall or overarching tax considerations that employers should be thinking about if they are going to be operating a hybrid model where people are working some of their time from home and some of their time from perhaps an office, whatever that looks like, in the future?

Zoe: It is interesting because so many businesses are working in a variety of different ways. So, each detailed scenario will of course have its own detailed implications, but we do see some real themes emerging here. Considerations arise in relation to things like making sure that any available tax reliefs can be taken advantage of, whether that is in relation to helping employees with additional utilities bills that they might have where sometimes you can help out with those or where additional resources have to be provided, so computer equipment for the home for example, which is often in addition to what is made available in a central business location.

Things like travel costs, what happens about mileage and expenses? What do we mean in these circumstances by a place of work and also are there any other risks that employers might face in relation to having employees who are working more flexibly, perhaps in multiple locations and sometimes even in different countries?

Anna: Just looking at that in a bit more detail. We have seen lots of issues raised about costs, for example, of individuals working from home. What is going to happen with commuting costs? Is there a solution to those issues, a one size fits all?

Zoe: Not really a one size fits all. I suppose the nearest we get to a universal answer with this is when we are talking about payments, like additional expenses which employees incur.

So there are two approaches you can take with that: either the employer can reimburse the actual additional expenses that an employee incurs, and then of course you have to make sure that the ones you are reimbursing are the ones that you can pay, or repay, tax free. Or there is a fixed allowance which can be paid and you do not need any evidence for that. So in terms of a one size fits all that is certainly the simplest solution and that is either a weekly or a monthly allowance. So that would be £6 a week which has gone up from the previous £4 a week that it was before 6 April 2020. Or per month that is now £26 instead of £18 as it was before April 2020.

Anna: Is that something that the employee claims or can the employer claim that?

Zoe: So, that is a payment which is made to the employee by the employer. So, that is a tax free addition to their normal remuneration.

Anna: OK, so what about equipment? What if I want to go out and refit my home office, is my employer going to be obliged to pay for that, are there tax reliefs that the employer can claim there?

Zoe: Yes, absolutely. So the first point to make is that the employer is not obliged, from a tax perspective, to fit out anyone's home office. There will of course be considerations that you would know a lot more about than I do, around making sure that employees still have a safe and healthy working environment but that is not really a tax issue.

But certainly, there are things that an employee who needs them can buy themselves for their home office and then reclaim. So, if the employer's policy allows it, the individual should be able to make qualifying claims direct from the employer.

If the employer's policy does not allow it and the expense meets the tests for reimbursements, then the individual may be able to claim through their personal tax return.

Would it be helpful to talk a bit about the kinds of expenses that might qualify?

Anna: Absolutely, because obviously there are so many of them, but yes, please, that would be great.

Zoe: I am not going to recite the whole of the book on these otherwise we would be here all morning. But for example, things that the employer can reimburse would be additional expenses such as extra utility costs like electricity and gas and metered water. If the employee needs to take out additional insurance because they are working from home then that can be covered.

But interestingly, if the employee makes the claim they cannot claim themselves in relation to additional insurance.

There are other things of course that would be incurred anyway, that you cannot get tax relief for. So things like mortgages, rent, council tax, standing charges, those sorts of things, unmetered water you cannot claim. When the employee is saying, of course, that they have incurred additional expenditure, the employer may want some evidence of that, and sometimes it is not easy to calculate what those extra costs are, and in those cases that is where that £6 a week or £26 a month can come in quite handy.

So, if someone is buying equipment themselves and they are looking either for reimbursement from their employer, or they are looking to claim tax relief in their personal tax return, the expenses have to relate to buying equipment for the sole purpose of enabling the employee to work from home.

That is where things like broadband get tricky because in general you cannot claim for anything that has a mixed use for personal and private reasons, and broadband is one of those things? I cannot really imagine anyone having broadband in their home and not wanting to use it for personal purposes as well as for business purposes. There may be some exceptions and it will be very interesting to hear about any exceptions on that that anyone knows about, but in general the answer is no for broadband.

But things like needing to buy a desk specifically, or perhaps needing to buy a printer or an additional monitor, computer equipment and things that are thoroughly for the purposes of carrying out the work under the employment-those are generally OK.

Anna: So, when you are thinking about equipment then it seems to me from what you have just said it is going to be important for the employer to make sure that there are rules written into usage so that it is easier to demonstrate that there is not a personal use element to equipment.

So, for example, if you have a monitor for example, or a desk, we ought to be saying it should be used for work purposes, not for anything else, even though that might obviously be really difficult to police. But just something that can evidence the fact that it is not intended to be for personal use.

Zoe: Yes, that is right. That can be really helpful and then when you look at the kind of assets that are most likely to be used for both purposes, some of those have rules of their own. So, if we look at mobile phones, for example, an employer can provide one mobile phone or a sim card for business use, but if they provide a additional phone or additional sim card then that will be taxed as a benefit provided to the employee.

You also have to be quite careful when you are setting up the mobile phone arrangements because you have to make sure that the contract for the phone is between the employer and the telecoms supplier- not between the employee and the telecoms supplier because there is a very specific rule that says that if the employee arranges the purchase of the phone and arranges the contract themselves, then to the extent that the employer reimburses costs associated with the phone then there will be national insurance payable.

Anna: Right, so not necessarily as straight forward as it might sound when you are thinking about provision of equipment?

Zoe: No, that is right. You have to look very carefully of the type of equipment that has been provided, how it is going to be used and whether there any specific rules related to that kind of equipment that might apply and might either limit or prohibit the employer from making reimbursements to the individual in relation to payment or even making that equipment available to the employees without charge in the first place.

Anna: What about things like travel costs? What I might loosely call commuting costs. Is that going to be really dependant on what my contract of employment says about where I am actually located to work from?

Zoe: The contract of employment is definitely important, but as far as HMRC are concerned it is really what happens in practice that is paramount. So, the general rule in relation to commuting has not changed, and it has been in place for many years, and it says that it is not possible to provide tax free mileage expenses or any other kind of expenses in relation to normal commuting. Of course in line with so many other things, our understanding of what is normal has changed so much over the last year or so. So, you might have someone who was normally commuting into a single place of work five days a week and is now perhaps commuting to that place of work much more rarely.

So, then we get into looking at what is the normal work place, and again we have to look at the detail in any case, but as a general rule of thumb, we tend to say that if someone is going to a particular place at least two days a week on average then that is likely to be a permanent work place. So, travelling between the home and that location is very likely to amount to normal commuting.

So, if you have someone who works from home three days a week and goes into the office two days a week, then the two days a week when they go into the office would be normal commuting and you would not expect to be able to reclaim mileage expenses in relation to those two days a week.

If it is only one day a week, but they do it every single week on a regular basis, again it may be difficult to claim mileage in relation to that. But, to the extent that you have someone who would otherwise have been able to claim mileage expenses because they were going to an unusual location, for example, someone who might be travelling from either home or their usual office to a customer's premises or to somewhere on an ad hoc basis, they would previously have been able to claim mileage expenses and that will not change. They will still be able to claim mileage for travel carried out purely for business purposes where it is not commuting.

Anna: So, there may be some interesting issues arising then if you have a fully flexible model where people can literally choose when they come into the office and when they do not, perhaps. If there is no obligation on them to work from the office, it seems to me that it might be quite difficult to establish that that is the pattern that might then give rise to what is permitted and what is not permitted.

I think the Revenue will get wise to that.

Zoe: Oh I think for sure. So, when you are in the office you are normally in X location, but you choose to work from home, then simply choosing to work from home four days a week is not going to lead to that individual being able to claim mileage expenses in relation to day five when they choose to go into the office.

Anna: That is really helpful. So are there an incentives that employers should be thinking about?

Zoe: Well, the most obvious ones are making sure that where you are reimbursing people for expenses or paying those allowances, you are making the most of them. There is an annual investment allowance which individuals can claim.

So, it can be very helpful to employees if their employer is on the ball and is able to help them and perhaps provide some guidance as to what expenses they might be able to reclaim. But, of course, without venturing into the territory of providing tax advice on an individual basis to any of the employees, it is important to make sure that if any of the employees are seeking to make claims under their personal tax returns that they seek the advice of their tax advisers in relation to that.

Anna: You mentioned earlier, issues in relation to people who are working from abroad. We have seen that develop either through necessity because people have not been able to return to the country, and certainly we have had enquiries where employees want to continue working from abroad. What sort of issues might that give rise to from a tax perspective?

Zoe: It is interesting? Towards the beginning of the pandemic, there were articles in the press saying isn't this great, you can perhaps go and work from Barbados for a year or some other far flung destination and that sounded great for those who could do that but most of the questions that we have seen, really relate to somebody who the business wants to bring in and who is stuck in the jurisdiction where they have been working previously and perhaps is not able to come to the UK. Or someone who is working for a non-UK business and is in the UK because they cannot go back to where they came from.

Sometimes, this working outside of the jurisdiction of the employer may not necessarily be voluntarily and there can be tax implications that arise from that. Sometimes, it's implications for the employer to think about and sometimes it's also for the employee to think about.

Any time you have someone who is doing a job and earning a salary and who spends part of the year in one jurisdiction and part of the year in another, we have to look at whether, they may well be liable for tax in both locations and sometimes that means you can have double tax issues to contend with.

It is likely that the employer will still be accounting for tax in the normal year in respect of that employee, so if that employee has previously been subject to UK tax and on the UK payroll, you would normally expect that at least for the first while, until and unless they receive some advice they do not need to do that., They would still carry on accounting for tax in the normal way plus you have an individual who is living somewhere else and may well be also liable for tax there, so the employer may need to put in tax returns in more than one jurisdiction and then they would need to reclaim any excess they have paid in relation to double taxation or claim double tax relief, where that arises.

So, that is something that the employers and employees find that quite complicated and quite tricky but of course for the employer, it can also be difficult if what the employee is doing amounts to setting up an office and doing business on behalf of that employer in a different jurisdiction. You can end up with the employer , effectively establishing a permanent establishment of the business in that other jurisdiction, and where you have a permanent establishment somewhere else, you can be subject to tax on the profits made in that other location.

The scenario that clients are also wanting to avoid, is the one where they allow an employee to work at home or in a second home or whatever reason elsewhere and then, as far as the tax rules of that other jurisdiction are concerned, they are actually doing business in that other location and that can come with all sorts of tax and compliance headaches in that other jurisdiction.

Anna: Finally, the obvious question. What are the real issues here in relation to sanctions. What risks do employers run getting this wrong?

Zoe: The biggest risk, of course, is always going to be underpaying tax or failing to account for tax or put in tax returns or register for tax in one jurisdiction or another, so the risks in relation to the points we were discussing towards the beginning for reimbursement of expenses and provision of equipment. Of course, if you get that wrong then you have made additional payments to employees or provided benefits to them without having accounted for tax on those, you can end up with additional tax liabilities to pay or you can end up with tax reliefs being clawed back and, of course, there may well be interest and there may well be penalties to pay and then, of course, you have the risk of disgruntled employees who might have bought something that they thought they could buy tax-free or they thought they could write off the cost against their personal tax return and then it turns out that the item in their hand is more expensive than they thought because they do not get the tax benefit.

In relation to travel costs, similarly that is about having reimbursed employees for things and then finding out later that those are actually taxable benefits that have been provided.

And then, the biggest risk, I suppose, in terms of quantum is probably the permanent establishment risk and the risk of double taxation where you have employees who are working overseas.

Anna: Thanks Zoe. Lots of food for thought there and clearly some issues that employers are likely to have to grapple with as we start to move into returning to the workplace and for those employers adopting a hybrid working model, factors to think about.

If there are any questions or concerns that this podcast has raised, please do contact Zoe and continue to keep an eye out for our updates.

Zoe: Thanks very much Anna.