The tax implications of remote work

HMRC recognises work arrangements have changed permanently since the pandemic – here accountants consider the benefits and expenses that may incur tax.

Hybrid working – where employees work some of the time in the office and some of the time at elsewhere – has been in place for most businesses since the pandemic.

Some companies are trying to bring employees back to the office, though. Such a requirement would significantly increase travel costs and affect work-life balance. There have, nevertheless, been permanent changes to working arrangements since 2020. In April, the Flexible Working Bill 2023 finally became law, which gives employees the right to request flexible working from the first day of their employment.

As a result, HMRC has updated its relevant guidance to reflect changes and clarify the costs and expenses which can and cannot be claimed in tax relief.

HMRC is clear that employees cannot claim tax relief for ‘ordinary commuting and private travel’, which includes travel between home and place of work. This covers hybrid working arrangements.

HMRC guidance (section 3.39) states:

“Modern information and communications technology has allowed many more employees to work from home on a flexible or hybrid basis. Under such arrangements, the employee will have a base office and journeys from home to that location will be ordinary commuting.”

As per HMRC guidance, the following can be claimed for as expenses, so long as it does not form part of the regular commute, but is still work-related:

• public transport costs
• hotel accommodation for overnight stays
• food and drink
• congestion charges and tolls
• parking fees
• business phone calls and printing costs
• business mileage.

So what costs should businesses be covering under hybrid working arrangements, and what are the tax and accountancy implications of remote work?

Return-to-office incentives can carry tax and NI costs

Nick Bustin, Employment Tax Director, haysmacintyre

The impact of the Government’s mantra “Stay at home, Protect the NHS” is still noticeable today in terms of where employees work. Some businesses have introduced initiatives to encourage employees back to the office. For example, providing breakfasts, fruit baskets, social events and covering commuting costs. However, the use of such incentives will come at an additional tax and National Insurance cost.

No benefit in charge will arise if breakfast and fruit basket provision are freely available to all employees, but social events can result in a benefit in kind charge and resulting tax/National Insurance liabilities. Employers will need to enter into a PAYE settlement agreement (PSA) with HMRC.

This is a contract between HMRC and the employer where the income tax and NIC can be paid on benefits provided to the employee, so long as one of the following criteria is met:

• the benefit is minor in nature, or
• the costs are incurred on an irregular basis; or
• it is impractical for the benefits to be dealt with any other way.

However, employers need to budget for almost a ‘doubling’ of the original cost of the social event once the tax and NIC liabilities are considered.

In relation to travel and commuting costs, there have also been instances where employees made the decision to ‘move to the country’ and were taken aback when employers wanted them to return to the office. Where the employer agrees to pay all or part of the employee’s commuting costs including any overnight accommodation, this will be liable to tax and NIC. This is on the basis that the cost of commuting merely puts the employee in a position to carry out their work; a point which is often over-looked by employers and employees.

Verdict: Many incentives to encourage employees back to the office will carry additional tax and NI costs.

Travel and commuting costs falls under taxable benefits – these trips must be properly documented to ensure tax compliance

Andrea Rozario, Chief Corporate Officer, Bower Home Finance

Some businesses now require their staff to return to the office more regularly as they continue to navigate the challenges and opportunities presented by hybrid working models.

In my view, travel or commuting costs for employees may fall under taxable benefits. However, these trips need to be properly documented and reported to ensure compliance with relevant tax regulations.

Increased overhead costs related to office maintenance and utilities may impact the company’s financial statements and tax obligations, necessitating adjustments in their budgeting and forecasting processes.

Verdict: Covering travel and commuting costs may fall under taxable benefits – these trips must be properly documented to ensure tax compliance.

If policies and expenses are the same as pre-pandemic, legal and tax implications are too

Emma Clewes, Head of Tax Advisory, Prime Accountants Group

I’m aware of a number of large retail corporates requiring head office staff to come back to the office full-time. Part of this is about addressing a disconnect between employees and business, and the feeling that it’s unfair people from head office don’t go to the office when others have to (drivers, store operatives, retail staff, etc).

If a business is thinking about making a shift in working practice – whether that’s working from home, encouraging people to cycle or take the train to work – you have to think about it carefully as there are legal and tax implications.

The main tax implications of whether or not to cover commuting costs come down to whether an employer recognises home as a permanent place of work. Driving to the office is not a business expense.

The problem businesses are having is the job market is buoyant, and if businesses are worried about losing staff, they may have to incentivise them to stay. Part of that could be paying a ‘top up’ for travel to the office or reimbursing travel expenses. This would have a tax effect on the individual and the company as it would be treated as an additional reward.

Businesses therefore need to communicate effectively. What is in staff’s contracts versus the accepted status quo will be different, so the recommendation is to formalise it.

Verdict: My message to businesses would be to think carefully about what your expenses and hybrid work policies say. If nothing has changed since before the pandemic, then coming into the office won’t have legal or tax implications.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.