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  • Katherine Bullock

Christmas 2020 – The Third Ghost - Tax and The Ghost of Christmas Futons

Christmas gets closer; the days get shorter; two spirits of tax have come and gone. So here is my third and final spectral guest, the Ghost of Christmas Futons, who comes to warn that even our homes, our very bedrooms, may not be safe from HMRC’s icy grip - specifically, the conversion of a spare bedroom into a full-time office, a move which may seems like a “no-brainer” to those who have the luxury of space to do so and who have been working at home during the current pandemic. However, in the spirit of the season, it also brings a reminder of a new tax relaxation for employees working at home. Hooray!

" also brings a reminder of a new tax relaxation for employees working at home..."

As most people are aware, CGT is not charged on the sale of a main residence, where Principal Private Residence Relief applies. So far so good. However, the relief is restricted where all or part of the dwelling house is used exclusively for the purposes of a trade, business, profession or vocation. In short, when you turn part of your home into a full-time office, you run the risk of a charge to CGT on sale. A bedroom-turned-office that occupied 10% of the total floorspace of your house might mean that 10% of the value of any future sale would be subject to CGT. While normally maintaining a separation between work and home life may be essentially for well-being, it could leave you unexpectedly out of pocket.

The test here is not the same as the “wholly and exclusively test” that applies when deciding if expenses are allowable in calculating trade or business taxable profits. Therefore, if there is any residential or private use of the room – however small – the relief should apply in full, if all the other conditions are met. Further, any apportionment will not normally affect the final nine months of ownership unless the exclusive business use has occurred throughout the whole period of ownership. Whilst using your home office to read, watch cat videos, home shopping etc should meet this test, it is easier to leave the essentials for it to function as a bedroom intact rather than completely refitting the spare bedroom as an office.

Where this is the case, the relief should be available, whether or not the expenses of running the office have been claimed as an allowable deduction from the profits of the business. In the same way, not claiming business expenses will not prevent a challenge to the availability of the CGT relief. To put the matter beyond doubt, one option might be to grant a licence to the business allowing non-exclusive occupation.

And there is more good news! Employers are able to make payments to employees free of income tax and NIC to cover the reasonable additional expenses of regularly performing their duties from home under a formal arrangement. However, during the pandemic, HMRC have confirmed that they will accept such payments where employees are working from home because they are self-isolating or their offices have closed either from when this was agreed with their employer or the government’s initial advice in March 2020. The reimbursement can be at the fixed flat rate – in which case no records or evidence is required – or on a scale rate or additional actual cost basis with evidence. However, the costs of putting an employee in the position to work from home are not permitted eg house conversions.

Where these costs are not reimbursed by the employer, the employee can normally only claim a deduction where the costs are incurred wholly, exclusively and necessarily for their work. However, these rules are also now relaxed for employees working at home for all or part of their time as a result of coronavirus in 2020/2021, provided this is decided by their employer. Again, the claim can be made at the fixed flat rate or on the basis of the actual costs incurred.

These expenses can include the extra costs of heating, electricity use on lighting and computers, phone and internet bills, and even extra equipment like webcams and microphones which had to be bought to attend virtual meetings (or virtual Christmas parties!).

As long as the individual was required to work from home at some point in the tax year, HMRC will accept a claim for the whole tax year. As usual, any claims can be made via the Government’s web portal, by phone, post or through your regular self-assessment tax return.

From 16 March 2020 to 5 April 2021, if an employer has purchased and provided any necessary equipment for the employee and provided there is no significant private use, no taxable benefit in kind will arise on the employee. If the employee incurs the expenditure and is reimbursed, there will also be no income tax or NIC on the reimbursement provided similar terms apply to all employees. Where the employer does not pay for or reimburse the cost of the equipment, the employee will need to claim capital allowances and whilst this may be possible for office equipment, claims for office furniture are unlikely to succeed, because they are not used in the actual duties themselves.

His message delivered, the Ghost of Christmas Futons at last departs, satisfied that his warnings will have helped us to both avoid CGT on our home to our long list of new problems in 2020, and to claim back some of the expenses caused by working from home during lockdown. And with that, my Christmas articles have come to an end. I wish you and your loved ones a safe and happy Christmas season, and look forwards to seeing you again in the New Year!


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