One of the features of the UK tax landscape which has attracted much attention in this COVID-19 pandemic is the difference (or inconsistency) between the tax treatment of the overall rewards of labour earned by an employee, on the one hand, and a self-employed individual, on the other. This distinction has always been a feature of the UK tax rules (and ways to resolve inconsistencies between the two have exercised the minds of many, including the government, over the years). A recent House of Commons Briefing Paper on IR35 and personal service companies noted that the overall tax burden for an individual deriving fixed total income of £50k from one source only is 32.3% for an employee, 24.5% for a self-employed individual and 19.7% for the sole director of his or her own company.
This discrepancy between the employed and the self-employed is largely accounted for by the difference in the national insurance contributions (NICs) burden borne by the self-employed, on the one hand, and the employed, on the other. Further, while the self-employed contribute significantly less than the employed by way of NICs, they receive almost the same public welfare benefits as those who are employed. According to HMRC estimates cited by the House of Commons Work and Pensions Committee in its May 2017 report on self-employment and the gig economy, the effective NICs annual subsidy to the self-employed relative to the employed exceeded the value of their reduced benefit entitlement by £5.1 billion. While recognising political constraints, the report – echoing a sentiment expressed by the Chancellor in a letter to the Chair of the Treasury Committee in March 2017 – called for (the then incoming) government to set out a roadmap for equalising the NICs made by employees and the self-employed.
The COVID-19 pandemic has given greater impetus to this roadmap. As the Chancellor noted in his announcement of the scheme of support for the self-employed on 26 March 2020, in devising that scheme – in response to the many calls he had received for support for the self-employed – it had become much harder to justify the inconsistent contributions between people of different employment statuses.
Another discrepancy (albeit on a smaller scale) between the tax treatment of the employed and self-employed, which may be deserving of greater scrutiny as a result of the pandemic, is the extent of the availability of tax relief for the expenses of homeworking. Working from home (or WFH) has, of course, been reasonably commonplace for employees for a number of years now. However, pre-pandemic, in general, it was probably viewed as more of a concession by the employer to the employee, rather than as a right of the employee, and, therefore, was likely, in general, to have been taken up a minority of the time. Once we fully emerge from lockdown, however, those businesses where employees have, during the pandemic, managed to work effectively from home may be or may be forced to be more receptive to requests by employees to work from home on a more regular and frequent basis. Indeed, having a greater percentage of the workforce working from home may create potential for costs savings for employers in terms of the size of offices needed to accommodate employees (quite apart from the health aspects of fewer employees in a confined space in the event of any need for ongoing social distancing).
With this potential change in the pattern of work, now may be an appropriate time for a review of the tax deductions available to employees for homeworking expenses. Currently, the ability of employees to claim deductions for these expenses is very limited. The conditions for claiming the relief are carefully circumscribed and it can, therefore, be difficult to claim it. The employee must be obliged to incur expenses under his/her employment and the expenses must, in law, be “wholly, exclusively and necessarily” incurred in the performance of duties of the employment, which, according to HMRC, must be “substantive”. HMRC set out what they see as the broad and relatively restrictive conditions for expenses incurred by an employee to be eligible for deduction: click here. Working at home by choice will generally preclude a deduction. Council tax/rent, mortgage interest, water rates and insurance are not eligible. However, for ease of administration, HMRC allows employees to claim a deduction of £6 per week/£26 per month for eligible homeworking expenses (in addition to the cost of business telephone calls) without requiring supporting records to be produced: click here.
Separately, there is an exemption from tax for payments received by employees from employers for “reasonable additional household expenses” which an employee incurs in carrying out duties of employment at home under “regular” homeworking arrangements between employer and employee. This exemption is more extensive than the right of an employee to deduct expenses given that it can apply to employees who work at home under a voluntary homeworking scheme. Further, HMRC would appear to apply this exemption more widely than the right of an employee to deduct homeworking expenses. Thus, payment by an employer to cover the expense of the employee’s additional contents insurance would appear to be deductible, whereas an employee would not (as indicated above) be entitled to claim that relief.
That said, the deductions available to a self-employed individual working from home are, in general, likely to be far more extensive still (see here). In general, so long as they are wholly and exclusively attributable to the business, the self-employed individual should be entitled to a deduction for business running costs, which are likely to extend to rent/business rates and office running costs generally.
There are, of course, good reasons for differences between the tax relief regime for employees, on the one hand, and the self-employed, on the other. Clearly there are major differences in the risk/reward ratio between the two: while the self-employed have a better tax position, they have minimal employment law protection, no income security and are benefitting society and the economy by entrepreneurialism. Further, given the entitlement of the employer to tax relief for salary costs, a more restrictive tax relief regime for employees’ expenses effectively precludes double tax relief for what would amount to the same item of income or profit.
However, with working from home becoming standard practice (if not the norm) and the resultant likelihood of employees incurring greater expenditure on work-related activity (in some cases, potentially, instead of the employer), the time would seem ripe for a rethinking or recalibration of the system of tax relief for homeworking expenses with a view (at least) to bringing it more in line with the system of tax exemptions for the reimbursement by the employer of expenses incurred by the employee, and, possibly a rethinking of that system too. As a practical matter, given the likely need for tax rises after the pandemic is over to help fund the massive rise in state expenditure required to deal with the economic fall-out of the virus, such rethinking or recalibration would probably be unlikely in the near future. However, the merits of such an exercise would appear increasingly undeniable.
Please contact Michael Fluss if you would like to discuss any of issues raised in this article.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.