Tax Talk: How to report coronavirus related benefits
Many businesses provided new benefits to employees as they adapted to the coronavirus crisis. Daniel Kelly explains how such virus-related benefits will be taxed and should be reported to HMRC.
The 2020/21 tax year imposed on us many changes to the way we live and work, as the country tried to contain the spread of coronavirus. Needing to act quickly, businesses either offered their people new benefits or made changes to existing arrangements, as the country endured three national lockdowns.
A new way of workingSuccessive lockdowns and a consistent instruction from government to “work from home if you can”, meant many businesses found themselves with staff unprepared for an extended period of remote working. While most employees already had a laptop, many lacked other essential equipment needed for sustainable home-working. Once it became clearer how long employees might need to be home-based, many companies provided or paid for office equipment to help their employees improve their home working environment.
Equipping the home office
In normal times, the tax and NIC position and reporting requirements would vary depending on whether an employer provided office equipment directly (company-owned items) to employees or reimbursed them for the cost of equipment they had bought themselves.
Shortly into the first national lockdown, HMRC announced a concessionary change which allowed employers to reimburse employees the ‘qualifying expense’ of office equipment for their home without incurring a tax or NIC charge.
To be a qualifying expense, the equipment must be used primarily for business purposes – with no significant private use by the employee. Items such as an office desk, office chair, monitor and auxiliary supplies usually provided at a place of work would be considered ‘qualifying’. The purchase of a new dining room table to provide more work space or a lounge lamp to improve lighting would not qualify, as it would be difficult to argue their private use was insignificant.
Do I report this?If the equipment (or supplies) meets the criteria for a qualifying expense, it will be non-taxable, regardless of whether you provided it directly to the employee or reimbursed them the cost of buying it themselves. These non-taxable expenses don’t need to be reported to HMRC. But, as always, we recommend you keep good records of such expenses to substantiate why you have treated them in this way.
Any non-qualifying expenses you reimburse the employee are taxable and should either be reported via payroll (with tax and NIC deductions) at the time of reimbursement or included as part of your 2020/21 PAYE Settlement Agreement – if you wish to pay the tax on these on behalf of your employees. See below for further information.
What happens when home working ends?For many companies, home working in some form will become a permanent feature of how their business operates. For others, it will end and staff will return to the office as soon as is practical and safe – as we emerge from what we hope is the final national lockdown. Where equipment is no longer needed for home working (or when an employee leaves the company), the tax treatment depends on what happens to that equipment afterwards. Equipment you’ve provided as the employer is considered a company-owned asset and must be returned to you to prevent any tax arising on the transfer of an asset to the employee. But equipment bought by the employee, where you reimbursed the cost, is never owned by the company. So, subject to any company policy, employees can keep it and no tax or NICs will arise.
Connecting the home officeFor home working to be possible, your employees require a broadband connection which at least delivers reasonably high speed internet. You may have agreed to meet the cost of home broadband, recognising that it will be used a significant amount for business purposes.
Where employees already had broadband before working from home as a result of coronavirus (and it is difficult to imagine many did not), any reimbursement for the existing or an improved internet connection is taxable.
Only where an employee had no broadband connection before working from home can the cost of installation and the ongoing contract be reimbursed tax-free, and only if private use is limited.
Essential travel to the officeAt the height of the first wave of the pandemic, fear was a much bigger factor than in later periods. During this time, many employees were reluctant to travel on public transport even when they needed to be in the office. You may therefore have paid for their expense of travelling by car (mileage and parking) or taxi to the office.
Even though there was good reason for paying employees’ travel expenses, stints between home and permanent place of work are still assessed as private travel and such expenses are taxable. Exemptions for late night taxis and travel to a temporary workplace apply as normal, and a specific exemption relating to cancelled car-sharing arrangements was introduced.
Taxable reimbursements for employees’ broadband or home-to-work travel expenses should be reported through the payroll or included in your PSA calculations for 2020/21.
PAYE Settlement Agreements (PSA)
A PSA is an enduring agreement (form P626) made with HMRC, for employers to settle certain tax liabilities on behalf of their employees on certain benefits. A PSA carries forward indefinitely for you as the employer until either you or HMRC cancels the agreement – or you choose to apply for a new agreement to include additional benefits on which to settle your employees’ tax liabilities.
For the 2020/21 tax year, if you already have a PSA, you do not need a new P626 for any additional items that were provided as a direct result of the coronavirus pandemic, as you can include these in the PSA return you submit to HMRC.
If you do not have a PSA with HMRC but would like to enter into one for 2020/21 in order to report centrally any taxable expense payments made due to the pandemic, you must apply to HMRC no later than 5 July 2021.
You may want to include other expenses or benefits on which you wish to pay your employees’ tax such as staff entertainment, long service awards and staff gifts and the same application date deadline applies.
Written by Daniel Kelly in our London office.