Tax relief for home broadband?

You have agreed to reimburse part of an employee’s broadband bill for when they work from home. HMRC’s guidance says that although this is a business expense, you must deduct PAYE tax and NI from anything you pay. Why is this and can it be avoided?  Audrey Rankine advises.

Generally, employers can reimburse or pay for their employees’ job expenses without applying PAYE tax or NI. This exemption can be used if an employee would be entitled to claim a tax deduction for the expense had they met the cost personally. The trouble is if there’s private use, other than incidental private use, no deduction is allowed for home broadband/phone costs because to qualify the expenses must be “… wholly, exclusively and necessarily incurred…” for the job.

Where the job-related and private elements of a cost can’t be identified separately, none of the expense is tax deductible. This means, if an employer pays for or reimburses an employee for any part of such an expense the whole amount is treated in the same way as salary with PAYE tax and NI deducted.

EXAMPLE
Julia’s job with Roberts Ltd requires her to work from home full time. She uses her broadband service over 90% of the time for her job. If Roberts reimburses Julia for any of her broadband bill it must deduct PAYE tax and NI (plus Roberts must pay Class 1 NI) from the amount paid. In addition to the main service, Julia pays a supplement of £10 per month to the broadband provider for extra anti-spyware and anti-virus software. This is an identifiable cost which Julia incurs wholly, exclusively and necessarily for her job. She is entitled to claim a tax deduction for it, or Roberts can reimburse her tax and NI free.

Getting around unfair rules
Taxpayers, accountants, the courts and even HMRC, have known for a long time that the “wholly and exclusively” rule can and often does result in an unfair outcome for employees and employers, but the good news is that in some circumstances it’s possible to work around the rule to produce a fairer result.

A special exemption applies where an employer contracts with and pays a service provider for an employee’s home broadband/phone bill. The payment is exempt from tax and NI as long as the private use by the employee and their family is not significant.

Accommodation expenses
The exemption allows employers to provide for goods and services at an employee’s home so that they can work there, even where the employee gains a personal financial benefit from them. The key points for the exemption are:

• There’s no financial cap.
• The employee must have a genuine need for the goods or services so they can do their job.
• The employer must pay for the goods and services and be contractually liable for their cost.

The exemption can apply to, say, office equipment, e.g. a desk, chair, computer and so on, as well as services like a phone and broadband.

SUMMARY
Reimbursement of expenses where no part of the costs can specifically be identified as a job expense are entirely taxable and liable to NI because of the “wholly and exclusively” rule. However, you can provide facilities and equipment, such as broadband, computers, office furniture, etc. for homeworking tax and NI free as long as any private use is not significant.

Contact the JRW Hogg & Thorburn team for further information.