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SW2000 Telework Studies

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Tel. +44(0)1865-760994 Fax 764520

Email noelhodson@btconnect.com

 

Director – Noel Hodson

 

 

This document deals with all UK taxes, some USA taxes, business rates, legal issues and tax breaks for teleworkers.

 

 

March 12th 02

 

Kirkwood (Inspector of Taxes) -v- Evans (the teleworker) -  Tax Allowances for teleworkers.

 

Thanks for the copy of the telework High Court tax case Kirkwood -v- Evans that I have just read but have not yet fully absorbed.

 

It seems that Mr Evans, teleworking for a Public Government body as a full time employee, spent 4 days a week at home in Norfolk and travelled to a central-office in Yorkshire that he attended one day a week for normal office hours. His tax claims for use-as-home-as-office and for his journeys to central office to be treated as business travel were denied and he was defeated, both in the Special Commissioners and at the High Court, in his claims (about £4,000 a year expense claims for each of 3 tax years) by (1) the telework contract being optional giving him the right to return to central office at any time (and therefore rendering his expenses as NOT “wholly and exclusively necessary for his business” as required by tax law, (2) by his visits to central office being regular weekly visits, rather than necessary business journeys, denying him the right to claim them as business journeys and having the costs treated as commuting costs, and (3) by the wording of the "home-working" agreement that did not require a separate room/space at home, thus blurring/ sharing the use of the extra heat & light costs between home and business.

 

In contrast, I attach my analysis of my work on the Prudential Ins. home-tele-working program (1994), where as far as I know, the tax allowances for 7,500 teleworkers are still being successfully claimed and have been for eight years.  - Noel

 

*********************************

 

13 Nov 01 – fax to ………a teleworker, a lawyer ………………………

 

Dear UK Teleworker,

 

Commenting on the threat from your local authority to levy business rates on you at home.

 

These cases are very rare and I’ve never known of a successful Business Rates levy on HomeWorking. From 1970 to 1980 as a tax accountant I had hundreds of clients, out of 1,500 files, who worked at/from home.

 

There was a case in 1992 when I wrote the book Teleworking Explained.

 

A man phoned me and said the rating officer (Kent or Sussex) had come to his home/telework office and after accepting that the teleworker did not have a separate office and in fact worked at the kitchen table, duly measured the table and sent a business rates demand based on its size.

 

I advised that taxes (rates, capital gains on the house sale) could only be levied for “exclusive” use – and even then only very rarely applied. This was put by the teleworker to the council and accepted. I no longer have the papers.

 

This year 2001, my friend A N Other was reported by neighbours in Framston Street, Westminster, for working (very quietly) at home. They had a worrying series of visits and letters threatening (a) to stop her working and/or (b) to levy business rates. I advised that most of the 600 MP’s and 500 Lords have an office at home in Westminster – I’m not sure if that argument helped, but Westminster Council withdrew after making themselves unpleasant.

 

In neither case was change-of-use applied for. 

 

My understanding of the law follows from hundreds of cases of Sch D versus Capital Gains. Where a home-worker claims office expenses for Sch. D purposes,  HMIT will ask “is this for exclusive use of the space”. The answer must always be NO, otherwise when/if the house is sold HMIT will raise a Capital Gains Tax assessment based on the VOLUME or AREA of the space used for work/business. If the space is not exclusive, (you party in it, wash the dog etc. etc.) then the capital gains assessment always fails. There is no reason at all to limit the annual expenses claims – these should be as robust as possible.

 

The VAT office uses this non-exclusive argument in reverse, for example before I built on my home-office downstairs, I re-carpeted the landing hall and stairs, ruined by clients tramping up through the house and claimed the VAT. We won the claim (for business purposes) but HMCE did restrict it on a TIME basis.

 

We are setting up ITAC-UK (International Telework Association and Council – UK) and I am very interested to learn of such cases – so pls keep me posted.

 

There are about 5 million traditional home-workers in the UK, mostly on low paid piece-work stuffing envelopes, cards etc. None to my knowledge pay business rates. (Low Pay Units, Women’s Rights etc have the latest stats)

 

There are about 4 million telework offices at homes in the UK, with about 1.5M in use daily (not necessarily full-time). I estimate, because the UK is too mean to pay for a proper survey, that about 1 million are in use every day.

 

And most persuasive, nearly every elected politician has an office at home.

 

If these arguments don’t wash with your local council – resort to mindless violence and shouting loudly – or give me a ring and I’ll see if I can write a useful letter. (NB – maybe check out how they rate National Trust properties open to the public with teashops etc). Always beware of the latent Capital Gains trap – and never claim “exclusive-24 Hours-use”.

 

Best wishes

 

Noel

 

********************************

 

Now follows: Review of the text books – law and taxes – for professionals.

 

The Economics of Teleworking 1994                    [1]


          Page - [1]             NCH-SW2000-Oxford

 

   

Part 6

6.1  Legal Notebook:

 

6.1.1  Many members of the public ask whether it is illegal to work at home or, if not illegal, is it difficult to comply with any applicable rules and regulations.

 

Safety in Numbers - 5 million Home-Workers

 

6.1.2  The answer is that it is perfectly legal and very easy to work at home. The most powerful evidence for this is that in the UK there are over 5 million people working at home, according to Department of Employment statistics. This number includes teleworkers who are identified by their use of advanced communications such as telephones, faxes, computers and radio and video phones as a necessary tool for their work.  The other home workers tend to be artisans such as plumbers, joiners, crafts-people, writers, artists etc; self-employed cottage industry "piece workers" such as envelope fillers, electronics assemblers, garment makers, knitters, etc; and employed piece workers in the same sort of occupations.

 

The Top Drawer Teleworkers

 

6.1.3  In addition to 5 million ordinary men and women who work at home in the UK (20% - 25% of the working population), most of the "great and the good" who wield power and influence in society have well equipped offices in their homes.  For example Churchill worked not only at home but, more specifically, in bed.  The Royal Family work at home, the Prime Minister, the Chancellor of the Exchequer and most Cabinet Ministers have offices at home.  Most MP's do some of their work at home.  Most academics have well stocked book-shelves and modern offices at home, where they do much of their work.  Most local councillors have offices at home. In fact any busy person will almost inevitably have a workstation at home which is in regular use.

 

A cacophony of law

 

6.1.4  The relevant legislation falls into 5 categories:-

 

1. Town & Country Planning Law

 

2. Mortgage Conditions

 

3. Landlord and Tenant Law

 

4. Local Government Law

 

5. Tax Law

 

6. Employment and Health & Safety Regulations

 

7. Union Guidelines

 

6.1.5  Excluded from this list is the law of property and transfer of property, which fills many volumes.  The assumption for this paper is that ownership or occupation is not an issue.  Items 6 & 7 are not detailed below.  Item 6, Employment and Health & Safety Regulations remain the same for employers and employees. Item 7, Union Guidelines can be found in the book "Teleworking Explained" Wiley & Sons ISBN 0-471-93975-7 November 1993.

 

Never volunteer - advice to the young and the bold.

 

6.1.6  Before examining each of these five areas, a word of warning.  Never volunteer to be a legal test case. And if you are called to defend your right to work at home - unless you are guaranteed backing by a wealthy major employer - give in and abandon the fight.  It will prove cheaper and you will live longer:-

 

"In law nothing is certain except the expense" - Samuel Butler.

 

"As a litigant, I should dread a lawsuit beyond almost anything short of sickness and death" - Judge Learned Hand.

 

"Ninety percent of our lawyers serve ten percent of our people. We are over lawyered and under represented." - President Jimmy Carter.

 

"I had rather that my daughter should be burned at the stake than to have to suffer what I have gone through with lawyers" - Hetty Green.

 

"Litigant: a person about to give up his skin for the hope of retaining his bones" - Ambrose Bierce.

 

 

Disclaimer: This summary, Legal Notebook, is for the readers general guidance only. It is not a comprehensive summary of the laws discussed and any advice it contains are the views of the authors and are not legally reliable.  Readers must take legal advice before acting on any of the matters or information set out here. The author/s and publishers do not guarantee the accuracy of any part of this Legal Notebook text and cannot be held responsible for any act or omission committed by any person purporting to rely on this text.

 

6.1.7

 

1. Town and Country Planning Law.

 

If a building is occupied as a home, with the usual conveniences such as bathrooms, kitchen and bedrooms, it normally requires permission under planning law as a domestic or residential l building.

 

Protected residential areas.

 

This planning permission sensibly protects the public from finding themselves living next to industrial activities, leisure activities or commercial activities which would be so noisy, dirty or dangerous as to be hazardous to their health and detrimental to their welfare.  For example, up to 1955 and probably later, there were several hundred "Coronation Street" type homes in Trafford Park near Salford & Manchester; then one of the largest and dirtiest industrial estates on Earth. The average life expectancy for residents was 38 years.  This lethal mixture of homes and factories was presumably a relic from a less industrialised age.

 

Protected industrial areas.

 

Conversely, industrial and commercial planning permits tend to protect businesses from the need to be concerned for children and other vulnerable members of society.  They can be noisy, dirty and dangerous and can generate large numbers of heavy vehicle movements, secure in the knowledge that the people in the vicinity are alert to and prepared for the inconveniences and dangers involved.

 

Grey areas.

 

As with all rules, human activity does not fit neatly into planning law.  There are innumerable cases where permission has been granted or withheld and arguments have ensued over the decisions.  Common-sense, if applied to working at or from home, will in most cases be a sufficiently accurate guide to what the law intends and be in accordance with the law.

 

UK law relies on precedents, or past cases, to build up it's rules which, in theory will be applied in similar cases thereafter.  These rare "Just Decisions" often aren't applied again due to differences of emphasis, wealth, power, gout or indigestion affecting the judges.  However, over decades and centuries, some sensible non-partisan precedents are set which only the most brass-necked, heavily bribed courts or government officials are willing to publicly flaunt.

 

Examples of the Law.

 

There are 35 main Statutory Instruments (books of rules) which have been published since 1947 on Town & Country Planning. 

 

Residential or Commercial Planning Permission

 

For teleworkers, the first level to examine for home-working is the permission granted in respect of the home in question.  In all but the most extraordinary circumstances, it's planning status will be Residential, Class C3 Dwelling Houses.  If it is not, then question whether it should be occupied by a household.

 

Teleworkers are unlikely to be unknowingly living in commercial or industrial premises.  If they are, there should be no difficulty in carrying out their work in the premises.  They may have legal difficulties in continuing to live there however.

 

Specific Planning Conditions on Residential Properties

 

The second level is to examine whether any "Conditions of Planning Permission" affect the activities which can be carried on.  For example in Fawcett Properties Ltd -V- Buckingham County Council (1961), a pair of farm workers cottages were built on the planning condition that occupation be limited to "persons whose employment or latest employment is or was in agriculture as defined by s119(1) of the Town & Country Planning Act 1947" and the court upheld this condition.

 

For modern teleworkers, the definition in the 1947 Act is unlikely to be stretched to cover working with advanced communications; however, it is equally unlikely in the unemployment climate of the mid-1990's that Bucks County Council would now seek to enforce the condition if it meant depriving a teleworker of their rural home and their rural livelihood - a livelihood probably beyond the imagination of those who drew up the 1947 Act.

 

A second more recent case, Alderson -V- Secretary of State for the Environment (1984), examined a planning condition which limited occupation to persons "employed locally".  There was a legal argument as to what "locally" meant but in the end the Court of Appeal upheld the condition. It presumably existed (1) to ensure the house remained affordable to local employees who would otherwise have to compete with London region salaries and (2) to reduce the trips in the area otherwise generated by long distance commuting.  What a court would decide today if the house were now occupied by a teleworker working at home for an employer in, for example, America; remains a legal conundrum to be tested in the future.

 

Another case where activities in the home were restricted by a planning condition was New Forest district Council -V- Secretary of State for the Environment (1984).  A bungalow had been built with the condition attached that it should be occupied by employees of an adjacent hotel or forest workers only.  The Secretary of State overturned the condition and discharged it, against the wishes of the planning authority.

 

It is doubtful whether the conditions imposed in the above three cases would have prevented, or were intended to prevent other members of a qualifying occupant's family from working at home, in any capacity which did not flaunt local bye-laws or inconvenience neighbours (see below for local bye-laws).  Teleworking as a second job would also appear to be within the conditions imposed.

 

People who are concerned that their homes may have planning restrictions which qualify occupants in some manner should have been advised of such conditions before taking up occupation.  They would therefore have a remedy against the landlords or their solicitors if restrictions do exist and they were not informed.  A telephone call and letter to the local planning department should be sufficient to elicit the exact planning status of any building including any conditions; it is wise to specifically ask about conditions.

 

Listed Buildings

 

Listed, usually historic houses or houses of peculiar architectural merit, often have planning restrictions placed on them as to any repairs or alterations.  In exceptional cases, they may also have conditions concerning the occupants' work or work place. 

 

"Bad Neighbour Developments" do not include teleworking.

 

The construction of or use as:-

a) Public Conveniences

b) Disposal of waste materials

c) Winning or working of minerals (e.g. mining)

d) Sewage Works

e) Exceeding 20 metres (60 feet) in height

f) Slaughterhouses or Knackers Yards

g) Casino, Funfair, Bingo Hall, Theatre, Music Hall, Dance Hall, Skating Rink, Sports-hall, Swimming bath, Gymnasium, Turkish or Foam Bath.

h) Zoo's or boarding kennels

i) Motor racing tracks

j) Stadiums (e.g. Football Stadiums)

k) Cemetery or Crematorium

 

In addition, Circular 71/73 from the Secretary of State requires owners to put up a notice if their development will create a smell, vibration, bring crowds, cause noise at unseemly hours or have an adverse effect on residential areas.

Assessments include traffic generation - but they are unlikely to affect teleworkers.

 

Material Change of Use

 

Working at or from home or teleworking at home presupposes that the home is a building with residential planning permission (Class C3 - Dwelling Houses); an ordinary domestic house or apartment.  Material change of use would be the term under which any legal challenge to the occupants’ activities would be most likely to be mounted.

 

No threats to home workers.

 

There are no cases, quoted in the published text books consulted for this paper, of claims that working at home in itself constitutes a material change of use and therefore requiring new planning permission.  An application for which would probably be denied in a residential area.

 

2.   Mortgage Conditions

 

Mortgage Lenders are many and varied and the rules they impose or negotiate as conditions for the loan also vary widely. The rules will generally be designed to ensure the repayments are made on time and, if the borrower is unable to repay, that the lender can take possession of the property with as little legal hindrance as possible.

 

No sub-tenancies

 

The primary reason that many mortgage loans impose the condition that no businesses shall be run from the home securing the loan, is the fear on their part of legally defensible tenancies being created for that business. 

 

The lender will not usually agree, if asked, to any business, however humble and innocuous, becoming established in a home securing their loan.

 

 

3. Landlord and Tenant Law

 

For the same reasons as set out above for mortgage lenders, landlords of dwelling houses generally resist any sub-tenancies, whether they are domestic or commercial.

 

Impact on teleworkers

 

As stated above, the landlord's main anxiety is that a domestic tenant may create a sub-tenancy for a business or commercial activity which they carry on at home, and thereby reduce the landlord's legal rights to evict or involve the landlord in complaints by third parties.

 

Teleworkers are advised not to attempt to separate or advertise their activities in a manner which would give the landlord cause for alarm or place the landlord in difficulties with the local planning authority, neighbours, bye-laws or insurers.

 

Perhaps one of the clearest guides to the relationship between landlords and tenants is contained in the rules governing Assured Tenancies under the 1988 Act. This was designed to make the law simpler for both parties and thereby to encourage more private letting.  Under s8 of the 1988 Act there are 16 grounds for repossession of the property; which do not include teleworking.

 

A sample rental agreement contains the following relevant clause/s:-

 

1. "Not during the said term to use exercise or carry on or permit or suffer to be used exercised or carried on in or upon the premises or any part thereof any noisy or offensive trade or business whatsoever but will use the premises only as and for a private dwelling house"

 

2. "Not to assign charge underlet or part with the possession of the premises or any part thereof but in the event of an assignment or underletting being required by the Lessee the Lessor shall grant consent to any assignment or underletting of the whole in the case of a responsible and desirable person with proper references being put forward to the reasonable satisfaction of the Lessor."

 

3. "Not to do or permit to be done on the demised premises or any part thereof anything which may be or grow to be a nuisance damage inconvenience or annoyance to the Lessor or to the owners or occupiers of any adjacent premises."

 

4. "Not to allow any public meeting or sale by auction to be held on the premises or permit to be placed on the premises any bill signboard placard hoarding or other outward mark".

 

These four sample clauses are typical of conditions which would give a landlord the right to stop a tenant from carrying on any activity, including commercial activities, which inconvenience neighbours or which contravene planning law, bye-laws or insurance rules; or which might annoy the neighbours.

 

What is a Business?

 

"Business includes a trade profession or employment and includes any activity carried on by a body of persons whether corporate or unincorporate" it should be noted that the "business" is not carried on by a body of persons whether corporate or unincorporate (i.e. when the "business" is carried on by an individual), the "business" must amount to a trade, profession or employment if the tenancy is to be one to which the 1954 Act applies.  Whether a "business" exists is a matter of degree and fact in each case".

 

Examples given in Landlord and Tenant by JM Male, Pitman Publishing, 1993, of activities which fall within the definition of "business" in residential premises are:-

 

1. Governors of a Hospital administration.

2. Conducting a members tennis club

3. Church meetings

4. Government Offices

5. Letting furnished rooms

 

This would appear to not include teleworking as a "business" and therefore to exempt it from the prohibitions.

 

Summary

 

Given that there are 5 million home-workers the Government and the Courts are unlikely to penalise a home-worker who is acting responsibly.  Landlords fear the legal establishing of sub-tenancies and can become legally responsible if they acquiesce to business activities which contravene planning and other rules.  The legal maze surrounding tenancies is so complex that the knee-jerk reaction from most landlords to an application from a tenant to work at home is likely to be negative.  However, sensible and responsible work at home is unlikely to nullify a rental agreement and is likely to be supported by a Court.  A tenant could ask a landlord and be granted express permission without either being disadvantaged under existing landlords/tenants law.

 

The best advice is not to ask permission but to get on with your life and to work at home. If it is necessary to fight a test case, get your employer to wage the war and to pay for it; otherwise give in and move home, do not waste your life in legal battles - it will be infinitely cheaper than going to Court and the sum of human happiness will be greater.  

 

4. Local Government Laws

 

Local government has responsibility for the local area and as far as the home worker and teleworker is concerned, the neighbourhood around the house they are working in or from.

 

Relevant Local Laws fall into two categories:

 

4.1.  By-Laws; concerning noise, pollution and nuisances

 

4.2.  Rating: the local tax revenues usually based on property values and uses.

 

 

4.1 By-Laws

 

The local authority rules obtain their power under the Local Government Act 1972 and other statutory instruments. The By-laws will include control of: music; hawking; touting; loudspeakers; gramophones & organs; shooting galleries; indecent language; violence in schools; fighting; indecent bathing; indecent shows; wilful jostling; loitering; advertising; flags; defacing pavements; broken glass; carrying soot; carcasses; dangerous games; spitting; bulls; cycling on footpaths; dogs fouling footpaths; noisy animals.

 

Teleworkers can identify the items which relate to their work at home from the above list. 

 

There are few if any cases of homeworkers or teleworkers being required to desist working at home under local by-laws.

 

4. 2.  Rating - Local Taxes

 

Local authority rights to raise taxes date back to the poor Relief Act 1601 in the time of Elizabeth 1.  Innumerable Acts have been put on the Statute books since that time leading up to the Local Government Finance Act 1988 and later amendments.

 

Rates or local taxes are essentially raised on Residential Property or on Commercial Property, apart from a few brief years of the Community Charge or Poll Tax which we will pass over in an embarrassed silence.

 

The crucial question for teleworkers and home-workers is, does working at home attract a commercial or Business Rating demand?

 

The answer up to early 1994 is no. 

 

5. Tax Laws - Income & Capital Taxes

 

Tax law has an impact on all commercial activities. Teleworking is not excluded from this. In recognition of the international nature of teleworking, this section looks at both UK and USA tax law and draws some comparisons.

 

In general, it can be said that most teleworkers and other home-workers will benefit from tax allowances. As stated earlier, there is no more economic way of operating a business than living over the shop. Teleworkers do exactly that and reap the benefits.

 

There may be valuable tax breaks for teleworkers who work with the system.  As a new method of working, telecommuting or teleworking has not yet made any impact on the tax system. The advice set out below is based on current practices which may change if millions of teleworkers make tax claims for home offices and other expenses.

 

National Tax Regimes

 

Whilst tax rates vary throughout the western world economies, the statutory rules tend to be similar and the overall direct and indirect tax collections, as a percentage of income, are also similar. From studying the tax allowances for deductible expenses it can be seen whether a nation is encouraging or discouraging teleworking, or whether it has no policy.

 

Taxes, worldwide, tend to fall into familiar categories:

 

1.  Withholding Payroll taxes - Pay As You Earn, deducted at source from wages and salaries after various fixed allowances, usually monthly.

 

2.  Social Security & Medicare or National Health (Insurance) contributions - Usually a percentage of salary paid part by employers and part by employees.

 

3.  Income taxes  - reported by the tax payer as a self calculation of income and tax deductible expenses, usually annually.

 

4.  Benefits taxes - reported by the giver or receiver, usually payable by the recipient, on non-cash benefits such as free cars, free accommodation and interest free loans.

 

5.  Sales Taxes or Value Added Taxes - indirect taxes added to the price of goods and services. Often recoverable by business consumers but not by private individuals.

 

6.  Capital taxes - levied on gains or profits from sales of assets and investments including property. Rarely levied on nominal increases in value in the absence of a sale.

 

7.  Property rates or local taxes - Usually calculated as a percentage of the values of property and collected by the local state, county or town authority.

 

8.  Interest on business loans and residential mortgages- Not a tax but the tax relief on interest payable on such loans or mortgages is a major tax consideration for teleworkers with offices at home or in second homes.

 

 

WHO CAN CLAIM AND WHO PAYS

 

Rule 1.  He who pays the piper calls the tune.  The person or organisation who pays the expense is the one who is entitled to claim the tax relief or deduction.

 

Rule 2.  Any benefit to an individual is taxable.  If an employer pays part of your home office expenses either directly by, for example, sending a payment to the electricity company, or indirectly by paying the money to you, then you have received a benefit which must be reported and you must claim the original invoice as an allowable business expense, to offset the tax on the benefit received.

 

Rule 3.   Tax laws can be contradictory and confusing. Tax officers are paid to collect tax. If you ask their opinions on whether an expense is allowable, they are likely to say no.  Check with a tax advisor.

 

Rule 4.   Tax laws may not have caught up with teleworking.  Argue your case for tax allowances and persuade your employer to argue the case for you.  Keep in touch with and consult other teleworkers on their tax claims. Don't be isolated and don't try to fight City Hall on your own resources.

 

Rule 5.  You cannot get tax relief on costs you have not paid. There must be an invoice or claim from a third party and you must have paid or will pay that invoice or claim, to apply for tax relief.

 

WHY BOTHER - WHAT'S AT STAKE

 

There is a great deal of money at stake in tax claims for  Teleworkers, whether they are based at home, are travelling, are hot-desking,  employed or self employed.

 

Any expense you pay, for example a home office heating bill of œ500,  costs several TIMES more without tax relief than with. 

 

Elec Bill. Tax. Taxed Income. Tax relief.  Factor

 

 £500    10%    £555          £450       1.2

 £500    15%    £588          £425       1.4

 £500    20%    £625          £400       1.5

 £500    25%    £666          £375       1.8

 £500    30%    £714         £350       2.0

 £500    35%    £769         £325       2.3

 £500    40%    £833         £300       2.8

 £500    45%    £909         £275       3.3

 £500    50%   £1000         £250       4.0

 £500    55%   £1111         £225       4.9

 £500    60%   £1250         £200       6.2

 

This table shows that the higher the rate of tax you pay, the more valuable it is to make the claims.  For example, at a 60% tax rate, the last line of the table, to bring home enough money to pay a £500 bill requires pre-tax earnings of œ1250.  But, if œ500 is deductible at 60% rate, the net cost is £200 or 6.2 TIMES less than paying the same bill out of taxed income.  This table particularly applies to those expenses previously incurred prior to homeworking which become tax deductible when homeworking; and is particularly applicable to self-employed persons. 

 

If the days of 60% income tax rates return to America, teleworkers will have to learn to love their tax advisors as much as their tax advisors will love the Treasury.

 

In the USA, social security taxes increase the effective rate of tax for employees without conferring the right to claim allowances at the full rate. This also occurs in the UK.

 

In the UK, higher paid executives are in effect taxed at 60%. The higher tax rate is 40% and they pay circa 10% for National Insurance. The employer also pays circa 10% National Insurance, effectively coming out of the executives package.  But, the maximum income tax rate claimable on expenses, remains at 40% (National Insurance is not reclaimable). Thus the Treasury levies up to 60% tax rate while restricting relief to 40%.

 

WHAT CAN A TELEWORKER CLAIM?

 

While different authorities allow different expenses, the following lists the main items which you should consider claiming; though not all may apply in your case:-

 

1.  An office or workshop at home:

 

If you use your home as your main place of business then those expenses which would be incurred in similar commercial premises can be claimed:-

 

a)  Heat, Light and Power

b)  Telephone call charges

c)  Depreciation of furniture

d)  Depreciation of carpets or floor coverings

e)  Depreciation of fixtures and fittings

f)  Extra power points and telephone sockets

g)  Office equipment and stationery

h)  Postages and copying

i)  Cleaning including window cleaning

j)  Coffee, milk, sugar for meetings

k)  Assistants' wages

l)  Refurbishing or redecorating the area

m)  Extra security measures including guard dogs

n)  Business Insurances

o)  Professional fees  

p)  Entrance and Gardens improvements and maintenance

q)  Extra parking, garage or storage area

r)  Interest on property improvement loans or mortgages

s)  Local property taxes or rates

t)  Protective clothing

u)  Child Care and Creche’s (see next page)

 

(see Capital Taxes below for apportioning expenses)

 

To draw a list of expenses, imagine moving to a commercial area and renting a space.  All the expenses which such premises would incur may be incurred at your home office and, providing they are necessary for you to perform your work or business, may be claimed. Claims may not be agreed, however, and professional advice should be sought, particularly in the first year when precedents may be established for many years to come.  Keep detailed records of what you buy and why the work needs it.  

 

CHILD CARE AND CRECHES

 

It is virtually impossible to be a primary carer for children or others and do a professional teleworking job from home. But misogynist UK tax authorities are deeply confused about liberating parents and carers for full commercial employment. Wives were husbands' property and unpaid domestics, which attitude still applies today where wives cannot collect unemployment benefit. You, or your employers, may hire a secretary or assistant for part of the week at home, to help with your work, and their wages would be a valid tax claim. But child carers wages are not deductible in the UK.  Balance baby on your knee, exposed to keyboard skills, and be grateful for the right to vote.

 

In the USA, an employer can pay up to $5000 a year for employees child care costs, as a tax free benefit. If you hanker after holding high USA political office, remember to pay over their social security and medicare taxes, unless you employ your own (older) child under 21 where these are not required.      

 

Chief Executives and Junior Clerks:

 

The level of claims depends on the type of work performed and the accepted style of working environment required to carry out that work.  For example; a chief executive working at home and seeing colleagues, suppliers and customers there, can argue for a more expensive (and therefore credible) environment than a clerical worker needs.

 

2.  Other teleworking locations:

 

A teleworker may work from a mobile home, a road vehicle, use a telecenter, work from hotel rooms, or may live and work on a boat.  For tax expense claims the same basic logic applies:

 

A) Is it your primary place of work or business, your business address ? 

 

B) Is it known to be your place of work or business (printed cards, letterheads)?

 

C) Has the expense been incurred as a necessary part of your work or business (would your work be curtailed or made impossible without the expenditure).?  

 

D) What expenses would be incurred and allowed for tax if you were to hire or rent or buy the same facilities commercially, to enable you to do your work ?  

 

E) Any expense, paid or to be paid, which meets the above criteria, can be claimed by a teleworker; wherever they chose to live and work.

 

3. More than One office:

 

Generally an employed teleworker will find it difficult to justify claiming expenses for more than one office. Though such claims may not be impossible. 

 

For example an employed engineer may establish an office or workshop at home, then go on a field trip leaving a member of the family to handle communications with central office and customers.  If the engineer used the family's holiday home as a secondary base in the field, then expenses might also be claimed for that "use of home as office" while still claiming expenses for the original home base.   It would need to be demonstrated that two offices had to be in operation to enable the work to be done.

 

There is no difference in principle in tax law between the claims of a corporation needing more than one property for business, than it is for the individual.  It is however more difficult to prove the need in the case of an individual who necessarily leaves one office empty when using the other. 

 

A self-employed teleworker, in tax terms, has the advantages of being treated as a "business" with the disadvantages of being a sole operator.  The self-employed may be more successful than employed teleworkers in proving a case for two locations.

 

INTEREST ON LOANS FOR HOME OFFICES

 

Borrowing to build an office on to your home creates a mortgage or loan the interest on which in the USA is restricted by capitalized interest on qualified real property. The UK restricts interest to a total mortgage of œ30,000 on your home unless a commercial/domestic planning permission (which would probably be refused) has been obtained, splitting out the office cost and the borrowing; the commercial part will attract potential capital gains tax on any profit on sale (see below), but this may be less than the value of claiming the interest annually.

 

If your employer were to advance a loan for the purpose and waive interest, you would be taxed on the notional interest as a benefit, as long as you are the owner of the property.

 

At present, tax law lags behind teleworking and home offices, making it very difficult to build on for that purpose. But ask your tax advisor if there  are ways round the obstacles and lobby your political representative for changes to the law.

 

4.  Working Overseas 

 

It is beyond the scope of this book to advise on the complexities of foreign residency and ex-patriot working; involving double-taxation agreements between nations.  Teleworking does however allow people to work far from their central offices. In principle the costs incurred in working remotely are allowable for tax purposes. Such costs would include the communication system and call charges; video conferencing; tele-conferencing; necessary travel between locations; and mailing costs.

 

Teleworking is a relatively new activity but as it grows some teleworkers will choose to work from foreign countries.  Their residence for tax purposes will depend both on the laws of their host nations and upon the laws of their home nation.  Double tax agreements have been in place for years to deal with such cases. They work, in principle, by taxing the income twice (though this rarely happens in actuality), recording it on tax returns in both countries.  Depending upon the tax residence status of the individual, one country  receives the tax and the other credits the amount paid. 

 

For example, if the tax residence remains in the home nation (USA), then the annual tax payable is calculated as normal, the tax paid to the host nation is credited and the taxpayer pays or is refunded any balance.  Thus the taxpayer pays the rates of tax of his home nation.

 

As teleworking grows, it is not unlikely that wealthier "home" nations will review their double-taxation agreements and definitions of residency to ensure they do not lose income tax revenues while supplying jobs. 

 

5.  Travel Costs:

 

Telecommuting confers one of the greatest benefits of teleworking. It saves time, money and personal stress. If the home or local telecentre is established as the usual place of business, then the costs of travelling from that location rank as tax deductions.

 

Generally, the cost of commuting from home to a central location  is not tax allowable.  The majority of employees in the UK and the USA have to pay the costs of commuting from after-tax income.  The real costs of paying from taxed income are set out in above.

 

Example

Commute Costs pre-teleworking

  @ say 20 pence/mile for 6000 miles p.a.   = £1200

 

Tax at 30% makes pre-tax cost               = £1714

                                              ======

Commute costs post-teleworking say  1/5th   = £ 240       

 

Tax relief at 30%  gives net cost           = £ 168

                                              ======

 

Benefit to telecommuter  per annum          = £1546

                                             =======

Table

 

Motoring costs - and private use:

 

There is a general rule that no expenses tax claims can succeed if based on estimated or composite figures which do not relate to actual invoices or cash paid. Tax officers usually will not accept claims based on published composite rates such as the AA rate or the AAA rate.  An exception to rule this appears below.

 

OWN CAR

 

In the UK, where an employer pays a high composite rate per mile, including interest and depreciation, to reimburse an individual, the Inland Revenue assumes and taxes a benefit, multiplying the claimed mileage by a composite rate of benefit.  For the tax year ending 5th April 1993, the rates vary by engine size and by mileage;  for example: cars over 2,000 cc are rated at 51 pence for the first 4,000 miles and 27 pence for each mile.

                

For example, if an employee's (2000 cc engine) car travels 8,000 business miles in a year and is reimbursed by the employer at the AA rate, the employee will be taxed on a benefit of 51 pence on the 1st 4,000 miles = £2,040 and 27 pence on the 2nd 4,000 miles = £1,080. A total benefit of £3,120 @ 25% tax = £780.  The individual can opt to submit a (very) detailed account of expenses reimbursed less actual costs and be taxed on any difference.  Few elect to go through the process.

 

COMPANY CAR

 

Where a (+2001 cc engine) company car is supplied in the UK to an employee it may typically generate a taxable benefit on its value of £4,440. In addition an assumed fuel benefit of £940 is likely (the figures vary by size of engine, value and age of car).  The two combined give a tax bill at 25% of £1,345 per annum.

  

SEDENTARY UK TELEWORKERS BEWARE

 

Where a teleworker shows less than 2,500 business miles a year on a company car, the car value benefit will increase by a half to £6,660, the fuel benefit remains at £940 and, if the tax rate is 40%, will pay tax of £3,040. The company will pay a further £790 National Insurance (Social Security) tax.  For the time being, until the regime changes to perhaps include a carbon tax to discourage motoring, it pays UK teleworkers to travel more than 2,500 business miles a year.

 

THE HOME BASE BENEFIT - MANAGERS JOURNEYS

 

As calculated above, teleworkers who establish their main office at home and can therefore claim journeys to central office as business miles, benefit, at 40% tax rate, by a factor of 2.7 on their costs of getting to central office and back.  Clearly, a manager of dispersed teleworkers who travels to see them at their home or local bases can also claim the journeys as business miles.

 

6. Capital Gains on the Home Office

 

A Capital Gain on office use at home may only arise if you have made claims for business expenses. If you work at home but make no expense claims then the tax discussed here should not apply to you.

 

The USA Internal Revenue Service and the UK Inland Revenue may levy a Capital Gains tax on that part of a residence which has been claimed for business use.  This potential tax worries many home based teleworkers but its impact may be less serious than is feared.

 

Background:  Claiming expenses for using part of your home for work indicates that the office is a business "asset".  Having enjoyed tax relief on related expenses for the space, the Revenue view a sale as being separate from the normal non-taxable event of selling your prime residence or main home.  The tax authorities are not interested in the zoning or planning status of your home and office (see Planning Law - above)

 

In the UK, a precedent has existed for decades that if a home area has been claimed for business BUT NOT EXCLUSIVELY, i.e. also used by the family from time to time, then no Capital Gain would attach to that part of the property. This leads to subtle arguments over the size of annual expense claims, which are generally reduced by reference to time and space occupied for work in any one year.

 

1.  Any Capital Gains Tax (CGT) may be payable only if the house changes ownership, on a sale or death for example.

 

2.  In calculating a potential profit, the AREA previously claimed for business use modified by the TIME for which it was claimed are divided into the total profit.

 

3.  The total profit on transfer of the house is the difference between the cost and the sale price or the cost may be replaced by the VALUE at March 1982.

 

4.  The total profit is reduced by a process known as indexation; which sets aside the increase in value in the property as a result of inflation.  The Revenue indexes are below the real levels of inflation but do account for much of the increase.

 

5.  The total profit is further reduced by sale expenses including agents and legal fees and in some cases vital repairs.

 

6.  Expenses specific to the business area may be deducted from the business portion of the profit.

 

7.  Substantial retirement relief on the sale of business assets is available in the USA and the UK to over 55's. In most cases this relief will cover any likely taxable gain.

 

8. UK Roll-over relief or USA Postponement relief is available and will negate the profit if you purchase another residence and home office.   Whilst you may not be allowed to Postpone a gain on a home office under 'Selling Your Home' rules, such right may be available under 'Small Business' rules.   

 

9.  Personal annual exemption on Capital Gains is œ5,500 UK and a similar allowance exists in the USA, after which the tax rates charged are 40% UK and 28% USA.

 

HOME OFFICES TAX SUMMARY:

 

The tax laws on Capital Gains on home offices are generally flexible enough to postpone any gain until retirement, at which point retirement or age relief will generally wipe it out.  Cases of people actually paying Capital Gains Tax on selling their homes, are rare.

 

However, before deciding to overwhelm the Revenue offices with claims for use of home as office,  calculate the economic balance between annual Income Tax relief and a possible future Capital Gains tax bill.  The most efficient strategy is to claim high annual expenses for a very small home office, not used all the time for business.

 

Example:

(an average tax rate of 30% is used)

 

Income Tax:

Annual Expenses claimed and allowed      -   £10,000

 

Value to Teleworker (see above)          -   £20,000

 

15 years teleworking                     =  £300,000

 

Assume cash is saved (or not borrowed)

 Plus Interest at 2.5%                   =  £358,000

                                            =========

 

House Cost             £400,000

 

Sale 15 years later    £800,000

 

Gain                   £400,000             

   

Space claimed

as offices   1/5th     £ 80,000

 

Capital Gains Tax  @ 30%                 =  £ 24,000

                                            =========

 

Benefit to teleworker                       £334,000

                                           ===========

This calculation assumes that none of the nine possible reductions of the capital gain, as listed above, apply.                                

                              

Readers should refer to their accountants for more information, and check the indexes, sources and references in this book, for publications which may be helpful.

 

 6.2  Future View

                            

 Career Path of the Future - 1994 to 2024

For example; a young woman aged 26 currently training (1994) in a traditional professional city firm will find more senior staff teleworking over the next 2-3 years.  The firm will devise a formal teleworking policy and, influenced by international business opportunities, will improve their communications systems and encourage flexible hours, at the office or at home, to service clients in other time zones.  Access to the firm's information banks will be made location independent and opened to most employees.  Should the young woman have children in 1997, she might keep her job at say, 10 hours a week, mostly worked at home, with refreshers and training some days a year at central office.  As her children grow, (2007) she may increase her work hours slowly back to full time - still from home but meeting colleagues and clients elsewhere.  Now, perhaps needing a change, she could opt to return to central office, adding training and management to her duties.  Years later nearing retirement, she could opt to work from her home by the sea, her Yurt in Mongolia, or move into the inner-city; whatever suits her.

 

         

6.3  The Public Good - a social perspective.

 

There are claims that home-based teleworking is good for business and good for the community. The figures in the business cases above outline the business and individual cases; the pro's and con's for the community include:

 

6.3.1 Family and Friends:

 

If a company extended teleworking to 100 people usually travelling 15 miles a day, the home-based people would between them save 11,750 hours a year from commuting, equivalent to 1,566 working days.  This time can be used for hobbies, sports or simply to spend time with their families.  Most people would regard this as a social benefit.

 

6.3.2  Traffic De-congestion:

 

Commuting into cities at peak hours generally takes twice as long as usual. For example, commuting from Oxford to London takes two hours at peak times and one hour out of peak hours.  Some traffic analysts suggest that a small reduction in peak hour traffic - perhaps just 10% or 2 million vehicles - is sufficient to free-up traffic and let it flow smoothly.  The company's employees could make a contribution towards the required ten percent in their locality. 100 teleworkers would save 355,500 road miles per annum and free-up 100 town centre parking spaces.   If other local employers followed suit, in theory, the commute hours traffic would flow freely and save of thousands of people travelling time every day - including The company's commuting employees.

 

6.3.3  Traffic Pollution:

 

The home based teleworkers would save circa 15 commuting miles 5 days a week, totalling circa 350,000 miles and thereby save 14,000 gallons [64,000 litres] of petrol/diesel a year. This average fuel saving applies whether they would commute by car or train.  That amount of fuel in turn generates 25.2 million gallons [115 million litres] of undiluted, lethal exhaust gas at street level. Fortunately, exhaust gas is rapidly diluted to concentrations that merely make people ill. 

 

6.3.4  The Sunday Times and Friends of the Earth jointly studied levels of gas inside and outside vehicles in heavy traffic jams. They found, in March 1994, that concentrations were as much as 31 times higher in the vehicles than outside. It is healthier to keep the car windows open.  Unpublished government data analysed by New Scientist in February 1994 and using a method devised by Joel Schwartz of the US Environmental Protection Agency, resulted in the following:-

 

Effects of dust or particulate matter (PM10) emitted from vehicle exhausts.

 

Annual total deaths in England and Wales     10,000

 

Specific Locations        Number of Deaths

 

Birmingham                       282

Bristol                          111

Cardiff                           90

Leeds                            203

Liverpool                        165

London                          1927

Newcastle                        107

Belfast                          111

Edinburgh                        119

Table 6.3.5 

 

6.3.5a  For every death, from these poisonous micro-dust particles from exhausts, there are tens of thousands of children and adults suffering from breathing disorders and asthma; many of whom are on regular medication and  some of whom need to be hospitalised.

 

6.3.5b  The 25.2 million gallons of exhaust gas reduction due to home-based working by 100 The company's people, would not only maintain their own good health (as they would be most exposed to it) but reduce street level pollution for all town users. This has a health cost benefit for the district.

 

6.3.6  Driving less miles results in fewer road accidents.   It is possible to calculate the reduced hospital and health care bills and the reduced car body repair bills resulting from the 350,000 per annum fewer commuter miles saved. Lower mileage means less depreciation of the car and lower service bills.  50% of UK cars are imported so keeping cars longer between changes, due to reduced mileage, improves the balance of payments.  Similarly, much of the fuel is imported so saving 14,000 gallons will also save thousands of pounds each year.

 

Teleworking makes good business sense, good environmental sense and good PR

 

 

 

6.4  Bibliography:

 

 

Tax Law Sources:-

Inland Revenue Booklet 480(1992);  Tolley's tax Cases 1989;  Tolley's Tax Planning For Private Residences 1992;  Tolley's Tax data 1992-93;  Telecommuting Review report on Soliman -v- IRS;  IRS booklet Travel Entertainment and Gifts 463, 1992; IRS booklet Tax Guide For Small Businesses 334, 1992;  IRS Booklet, Selling Your Home, 523, 1992;  IRS, Employee Business Expenses for form 2106, 1992.

 

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