WFH tax relief claw back to affect thousands

You may have read last week that a “working from home” loophole has been flagged up to the Chancellor and, as a result, will probably now be closed. This is because Treasury officials discovered that these benefits cost the government almost half a billion pounds in lost revenue during the pandemic. We know, from the emails we promptly received from some of our self-employed clients, this has caused some confusion and concern, so here we’ll set the record straight and give you the facts and how they may (or may not) affect you.

Firstly, let’s look at what is going to happen.

HMRC is going to review a rule that allows higher-rate taxpayers who work even a single day from home to claim a yearly sum of up to £124.80 in tax relief and standard rate taxpayers £62.40. This is actually a long-standing allowance, dating back to April 2003 and was previously used largely by the self-employed, who typically have larger expenses.  It was also available to employees albeit on a much more restrictive basis. However, with the pandemic and millions more working from home, the cost to the Treasury has soared, from approximately £2 million a year before Covid to almost half a billion pounds over the last two years, thanks to 4.9 million successful claims being made since March 2020.

What does this mean for you?

Firstly, it should not affect the self-employed. Those who will be affected are employees and this is because for an employee to claim relief for an expense, the legislation says it must be incurred “wholly, exclusively and necessarily” in the performance of duties What is not permitted is tax relief when it is a matter of personal choice.

The problem has arisen because previously those claiming the relief had to prove they worked from home as a requirement to perform their work, but with the pandemic claimants were told by HMRC that they could claim the full yearly sum even if they had only worked from home for a single day during the tax year.  Moreover, claims could be backdated, meaning that anyone eligible who worked from home because of Covid but never made a claim was (and at time of writing, is) entitled to a two-year pay-out of up to £250.

The Office for Budget Responsibility suggested in 2020 that the scheme’s cost to the taxpayer would rise 12-fold from around £2 million a year to £25 million. However, the latest data from the Office for National Statistics show that c. 13.4 million people reported working from home in the seven days to Jan 16th 2021.  Even if they were only on the basic rate of tax (obviously millions are on the higher rate and can claim more) the scheme carries a potential annual cost to the taxpayer of over £836 million.

This is not what the legislation was intended for and it now means that the taxpayer is having to to bear this cost, which doesn’t seem right where employees are working from home as matter of choice (i.e. it is not necessary for them to work there), especially given that many, if not most, are probably already saving very significant amounts in commuting costs.

That said, there should be nothing wrong in reverting back to what the legislation actually says and for what it was originally intended – which is to support those who must work from home and cannot do their job anywhere else. We shall see…

Finally, it is interesting to note that the loss of a mere half a billion has exercised the Treasury so much. For some reason, the loss of that amount is deemed more important than the £4.3 billion given as Covid loans to over 1,000 companies that were not even trading when the pandemic struck and has now been written-off, which led to the nowadays almost unheard of, principled resignation of a government minister last week (contrast that with the leader of the government). And with the suggestion in the media that the Treasury told the National Crime Agency to “butt-out” of an investigation into this alleged fraud, it seems more is needed to tackle fraud and mis-management of our country’s finances…

Contributing Advisors