Exempt Homeworking PaymentsMonday, March 5th, 2012
The Income Tax (Earnings and Pensions) Act 2003 (ITEPA) contains Section 316A, which specifically allows employers to make payments to employees who incur additional household expenses as a result of working from home, free from tax and NICs. This section first applied for expenses incurred on or after 06 April 2003. The importance of this section is that:
- It relates to payments that the employer may make to the employee, and
- There is a threshold at which employers can make payments to employees which do not have to be supported by receipts, originally set at £2.00 per week, rising to £3.00 per week from 06 April 2008
- 316A allows for additional household expenses to be reimbursed free of tax and NICs above the threshold, however, these reimbursements have to be supported by receipts. If they are reimbursed but are unsupported by receipts, HMRC regard this as remuneration, therefore, taxable and subject to Class 1 NICs through the payroll
The section must not be confused with Section 316 under the same Act. Section 316 deals with instances where an employee can claim a tax deduction via their tax return for unreimbursed household expenses. The definition of a homeworker is much more relaxed under 316A than it is under Section 336 – see the below link to HMRC’s Website. This article deals with the exemption under 316A
What is a homeworker under 316A?
Section 316A, which allows an employer to make these unsupported reimbursements to an employee, specifies that they can be made to employees working under ‘homeworking arrangements’. It specifies two tests, as follows:
- An arrangement must exist between employee and employer to allow homeworking, and
- Under those arrangements, the employee must work at home regularly
Therefore, an employee who works informally at home or takes work home in the evenings or at weekends would not meet the ‘homeworking arrangements’ criteria.
The link below includes an example of where an employee meets the eligibility criteria under 316A.
What are additional expenses under 316A?
HMRC defines additional expenses under Section 316A as ‘additional household expenses that an employee incurs in carrying out the duties of the employment at home under homeworking arrangements’. Simply, if the employee incurs costs in addition to those he would normally incur as a result of a homeworking arrangement, these fall into HMRC’s category of exempt payments.
Therefore, additional costs for heating, lighting and metered water supply are the typical, most common examples. However, any expense that is additional to the normal household running expense could be considered. What are specifically excluded are expenses that would be incurred regardless of whether the employee was working under a homeworking arrangement – mortgage, council tax etc. It also disallows any expenses that are reimbursed which put an employee in a position to be able to work from home, i.e. office equipment, redecoration etc. 316A is specifically to do with reimbursed expenses under an arrangement that already exists
What amounts can an employer pay under 316A?
The history of thresholds is as follows:
- For additional expenses incurred on or after 06 April 2003, the employer could reimburse £2.00 per week free of tax and NICs without asking for supporting evidence. Payments above this are also allowable; however, have to be supported by receipts. If unsupported, the payment must go through the payroll for tax and Class 1 NICs
- The threshold was increased to £3.00 per week for expenses incurred on or after 06 April 2008
- The threshold has been further increased to £4.00 per week for expenses incurred on or after 06 April 2012
This increase to the threshold from £3 to £4 per week may necessitate the need for staff handbooks or expenses policies to be updated to ensure that they remain valid.
At our Conference last week, I spoke about the importance of employers getting dispensations in the circumstances where exemptions did not already exist, which prevented the reporting of the item on the P11D in the first place. This is another example of where a HMRC exemption does exist already (under 316A), therefore, it need not specifically be included in a dispensation.
Remember that the definition of a homeworker is much more defined and prescriptive under 336 as opposed to 316A.