The present crisis raises a number of issues for businesses with employees. Many will be encouraging homeworking: some will already be contemplating reducing headcount.
Where employees are required to work from home, there should be tax relief for the additional costs of doing so. Any reimbursement by the employer is tax-free and, to the extent that the reimbursement doesn’t cover all the necessary costs, the employee can claim tax relief on costs that he or she bears personally. These might include costs of heating and lighting a workspace, additional phone and internet costs, consumables and so on. HMRC don’t, however, allow deductions for any element of council tax, rent, mortgage interest or insurance.
The amount that can be reimbursed tax-free (or claimed, where homeworking is necessary) without the need to provide evidence was increased in the Budget to £6 per week (with effect from 6 April 2020). Where the actual costs can be shown to be greater, those actual costs can be used.
Some businesses that have seen or are expecting significant reductions in income or profitability will be already be considering difficult decisions on headcount, hopefully temporarily.
The tax consequences of enforced leave of absence either on full pay, reduced pay or without pay are fairly simple: whatever is paid remains “earnings” and tax remains payable accordingly. The pain may be reduced to a small degree by the “cumulative” nature of the PAYE system up to 5 April: as earnings reduce, tax adjusts and in effect tax overpaid in previous months comes back through the payroll.
Where redundancies are made, the normal tax rules apply: a statutory redundancy payment is tax-free, but pay up to the end of employment remains taxable, as does (very broadly) pay in lieu of notice. Anything beyond that is tax-free (up to a limit of £30,000).
One policy we have seen adopted is to make employees redundant and thus bring the employment relationship to an end; but to continue voluntarily to pay a weekly sum to ex-employees in the hope that it will assist in tiding them over and encourage them to return to employment when business picks up. Those weekly sums are – in effect – ex gratia termination payments and so are free of tax.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
Our dedicated coronavirus page has further advice and guidance for businesses facing the challenges of coronavirus.
