Remote working and VAT

The Coronavirus crisis has identified that some employees are able to work from home in the long term, but what is the position on reclaiming VAT on remote working allowance for staff? VAT expert John Craig finds out with the following example.

You have agreed to pay remote working employees up to £1,000 to pay for equipment and other homeworking costs. But can you reclaim any input tax?

The basic principle
The starting point is to always remember the basic principle of any input tax claim, the expense must be incurred for the purpose of your business and be linked to your taxable activities. If an expense is linked to exempt, non-business or private use, then it cannot be claimed. It is important to be clear about the difference between a business purpose and a business benefit.

Tax invoice
You cannot just claim input tax on the full payment made to the employee, i.e. £1,000 x 1/6 as a maximum figure. With any input tax claim, you need to look at each supply of goods or services on a stand-alone basis, and then decide if the expense meets the necessary conditions. You will need a tax invoice to support each claim to show that VAT has been paid to a registered supplier on the expense in question.

HMRC accepts that for expenses linked to employees, the invoices will often be addressed to the employee rather than your business. This is not a problem if the expense meets the business purpose test.

Ownership of goods
A lot of the allowance you pay to your employees will be used to buy goods for their new home office, e.g. office furniture or even a new laptop. If your business owns these goods, rather than the employee, then you can claim input tax. But if the employee owns the goods, you cannot claim input tax because the supply has not been made to your business.

If you make a future charge to your employees for any private use of their computers or equipment, perhaps through a salary deduction, you will need to treat the payments as inclusive of VAT, i.e. output tax is 1/6 of the amount charged to the employee and not 20%.

HMRC would disregard any small amount of private use as being incidental to the business purpose of the expense. But if you own the goods and claim input tax, don’t forget that you will need to account for output tax if they are sold in the future.

FURTHER GUIDANCE
HMRC has now published further guidance which adds an interesting dimension to the exemption.
HMRC says that the new tax and NI exemption for when an employer reimburses an employee (or director) the cost of equipment applies even if the employee retains ownership. However, we recommend that employers take ownership so they can recover the VAT.

Yours to keep?
HMRC now says that the exemption applies if the employee, or director, retains ownership. In effect the employee gets a tax and NI-free gift.

Notwithstanding HMRC’s latest guidance, we can’t see why you would want to give the employee ownership. There are good tax reasons for this. Firstly, by taking ownership you can reclaim any VAT paid on the purchase, and secondly you can still allow the employee tax and NI-free use of the equipment after they return to the normal workplace if the reason is to allow them to work from home from time to time.

Home improvement costs
You might agree that your employees can use some of their £1,000 payment to improve the décor of their office area, e.g. having it redecorated or fitted with a new carpet. Unfortunately, this spending would be classed as a private expense linked to the employee’s home and therefore no input tax can be claimed. It makes no difference if the decorator or carpet supplier invoices your business rather than the employee.

CONCLUSION
As an employer, you should review each purchase invoice where VAT has been charged and consider if it meets the business purpose test needed to justify an input tax claim. You cannot claim on any services linked to the maintenance or improvement of the employee’s home such as decorating work.

HMRC says that the new tax and NI exemption for when an employer reimburses an employee (or director) the cost of equipment applies even if the employee retains ownership. However, we recommend that employers take ownership so they can recover the VAT.