Tax Talk: Tax Implications Of Hybrid And Distance Working

In the first Tax Talk of 2023, some thoughts on hybrid working in the wake of the final report by the Office of Tax Simplification.

I will declare an interest in this subject:  I live in Newcastle upon Tyne and mainly work remotely for FSL, with travel to the London office under our company hybrid working policy.


In its final report before it formally closes in April, the Office of Tax Simplification looked at the tax implications of hybrid and distance working becoming more common since the COVID-19 pandemic.

Hybrid workers – defined as those who “spend some of their working time in their employer’s workplace and some of their time elsewhere (typically at home, but sometimes in a different country from their normal location)” – were mainly concerned about the costs of travel and having a workspace in the home and whether these costs could be given some form of tax relief.

The report also looked at distance workers “where the employee works permanently in a different country to the business location”.  Though, I won’t touch on that in this blog.


Tax relief for household expenses

There are some existing tax reliefs for employees who work from home.  For instance, an employer may make a payment to the employee for “reasonable additional household expenses” which were incurred by the employee working from home.  As explained in HMRC’s employment income manual, these arrangements do not have to be written but they must be formal arrangements – choosing to work from home one day while waiting for a delivery won’t cut it.

The amount of additional household expenses that may be reimbursed in this way is limited only to what is “reasonable”.  You may notice that this is not a number, percentage, or any other quantifiable amount, but a subjective estimate.  This of course gives the taxpayer leeway to argue for a larger sum – and of course for HMRC to argue the opposite.

The alternative to this was popularised during the COVID-19 pandemic thanks to HMRC loosening their interpretation of what was “reasonable”:  A flat rate of £6 per week or £26 per month could be either paid by the employer to the employee or added to the employee’s personal allowance (amount of tax-free income) via their tax code.


Travel expenses are hard to deduct for tax purposes

Relief for travel expenses, on the other hand, is far stricter.  HMRC will only ever permit relief for travel expenses, whether via reimbursement by the employer or deduction from income, where the travel is wholly, exclusively and necessarily for the purpose of the employment, and is to a temporary workplace.

This means that one’s regular commute from home to the office is not an allowable expense.  That is, if you are lucky enough that your employer reimburses you for the cost of your commute, HMRC will simply treat that amount as additional taxable earnings from your employment.

This is because the location of your home and its distance from the office is a personal choice, therefore the journey cost is not wholly related to the employment but is partly personal.

But “regular commute” does also cover an employee’s commute from home to the office where the employee has formal homeworking arrangements.  The actual wording of the statute in question, section 338 of the Income Tax (Earnings and Pensions) Act 2003, states that a deduction from earnings for travel expenses is not applicable “to the expenses of ordinary commuting”, and defines “ordinary commuting” as “travel between the employee’s home and a permanent workplace”.

Your employer’s office is a “permanent workplace” even if you do not work the majority of your time there because the test is whether travel to that workplace has a pattern to it.  Once a fortnight is still “regular”, if not frequent.

Some hybrid workers responding to the OTS’ call for evidence said tax relief on travel into the office would “encourage” them to go into the office.

Speaking personally, I do not think that the tax system is the best avenue to encourage hybrid workers to travel into the office.  I think it is more likely that workers will make hybrid working a key demand of workplaces which can offer it, and that those workplaces which cannot offer hybrid working will in turn make compensation of the time lost to commuting a key element of their remuneration offer.


A cover-all allowance?

Another suggestion was to allow employees to claim tax relief on home working costs such as equipment, or even to offer a general “employment allowance”.

Sole traders are permitted to claim a £1,000 Trading Allowance in lieu of listing and claiming expenses for each item of eligible expenditure when calculating their annual profits.  Similarly, landlords may claim a £1,000 Property Allowance to cover their expenses on rental income rather than claim each allowable expense.

These are simplification measures which help smaller traders.  An Employment Allowance could serve a similar function by allowing employees to claim the costs of home working from their income, and as the report suggests it could be “easily dealt with by the PAYE system, using the tax code where the allowance was not paid by employers”.

The more, let’s say, ignoble employers may view such an allowance as an opportunity to offer employees lower remuneration.  There is little that Government could do about this, and in any event what would be effectively an additional £1,000 personal allowance for many people could be very helpful in spite of any unscrupulous behaviour.


Even minor benefits could be affected

The cycle to work scheme is a common benefit offered to employees where the employee hire-purchases a bicycle through deductions from their pre-tax salary.

But one of the scheme’s eligibility criteria is that at least 50% of the bicycle’s use must be for “qualifying journeys”, i.e. commuting to work.  This requirement, much like the requirements for “reasonable additional household expenses”, was eased during the pandemic.

Because of this criterion, an employee who works from home is ineligible for the scheme or would have severely diminished use of their bicycle compared to an office-based employee (and how would an employer seriously monitor compliance with the rule in such circumstances?).  The OTS reported a clear call by respondents to reintroduce the easement that was brought in during the pandemic and to make it permanent.

Other benefits affected include:

  • Provision of office equipment for home use
    • Currently the employer cannot allow employee to keep equipment and cannot allow reimbursement
    • Respondents requested an exemption for employee reimbursement.
  • Electric vehicle charging points
    • Currently no taxable benefit for charging at or near the employer’s premises but reimbursement of charging costs is taxable
    • Respondents requested this be made exempt too, along with reimbursement of charging facilities.
  • Workplace nurseries
    • Currently any childcare provided must be on the employer’s premises or under partnership and does not extend to private dwellings or commercial nurseries
    • Respondents requested the exemption be extended.

The report concludes by acknowledging that there were many requests for exemptions, easements and reliefs, all of which would come at a cost to the Exchequer and therefore the taxpayer, and that the OTS understood the Treasury would decide on priority policies.

Whatever the Government decides, it is clear that modern working practices have outgrown the tax regime and that adaptation is required.  Whilst some in Government have spoken out against hybrid working, I certainly hope that the more pragmatic voices in our political sphere speak clearly and persuasively on this matter so that the reality of modern hybrid working is met with a clear, fair, and attractive tax regime.