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Employers will not be required to report reimbursed expenses when employees need to buy equipment

In light of the continuing impact of the Covid-19 outbreak, the temporary income tax and national insurance contributions (NIC) exemption for home-office expenses has been extended to cover the tax year 2021-22.

This will mean that:

  • employees can continue to purchase the office equipment necessary for them to work from home as per government guidelines without worrying about the income tax and NIC consequences
  • employers will continue not to be required to report the reimbursed expense, which would normally be liable to income tax and NIC.

An existing tax exemption under section 316 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA03) applies where an employer provides supplies (such as home office equipment) directly to the employee and retains ownership of those supplies, and the employee’s private use is not significant. This exemption does not extend to employer reimbursements for employee expenditure on home office equipment as it only applies when the supplies are provided by the employer. It has been more difficult for employers to provide equipment directly during the Covid-19 outbreak.

A deduction from earnings is also available under section336 ITEPA03, where an employee incurs a cost in respect of an amount that is “wholly, exclusively and necessarily in the performance of the duties of their employment”. The corresponding NIC disregard is contained within schedule 3 of the Social Security (Contributions) Regulations 2001.

However, the current rules mean that where an employee buys their own home office equipment and is reimbursed by their employer, they will currently not be entitled to tax relief. This is because the expense incurred puts the employee in a position to perform their duties and is therefore not incurred in performance of their duties.

This principle applies to the tax treatment of employee expenses generally.

To provide effective support for employees in the current situation, SI 2020/524 created an exemption from a charge to tax under Chapter 10 of Part 3 of ITEPA in respect of expenses reimbursed to employees for the purchase of home office equipment in the circumstances outlined above.

This legislation was introduced under section 210 ITEPA03 (power to exempt minor benefits). SI 2020/525, which was made under section 3(2) and (3) of the Social Security Contributions and Benefits Act 1992, introduced a corresponding Class 1 NIC disregard on the same amounts. This legislation ensures that employer reimbursements for the cost of home office equipment expenses are exempt from income tax and NIC.

For the expenditure to be exempt from income tax and disregarded for NIC, it must meet the following two conditions:

  • equipment is obtained by the employee for the sole purpose of enabling them to work from home as a result of the Covid-19 outbreak
  • the provision of the equipment would have been exempt from income tax under section 316 of ITEPA if it had been provided directly to the employee by or on behalf of the employer

As the tax exemption was made under section 210 ITEPA, and as required by section 210(2), it will be conditional on the benefit of any reimbursement in respect of home office equipment expenses being made available to all of an employer’s employees generally on similar terms.

This article has been shared from ACCA In Practice, to whom copyright belongs.  Whitefield Tax are an ACCA Member Firm