Contractor expenses if working from home due to covid-19: refresher

Many contractors worked from home even before the Covid-19 pandemic struck, but more and more freelance and contract professionals are doing so now, especially as local and national lockdowns come back into play.

Here, exclusively for ContractorUK, Emily Coltman FCA, chief accountant to FreeAgent, outlines what this might mean for independent workers and how much you can claim as expenses, notably if you pass the crucial ‘have to’ test.

Sole traders

As many contractors look at alternatives to the staple limited company, let’s first address the expenses position of sole traders working from home in the age of covid.

Positively, if you’re operating as a sole trader, the rules are more generous than for company directors and other employees. In brief, you can claim a business proportion of many of the costs of running your home, if you work from there.

Increased homeworking in this Covid age is a fairly straightforward concern for sole traders. Unlike limited company directors, there’s no requirement for a sole trader that you ‘have to’ work from home in order to reclaim the costs of doing so, so the result is likely to be, very simply, that you can reclaim more from your business for increased time you spend working at home.

Whether you can ask your clients to pay you extra for working at home depends very much on the contract you have with them. You may be able to negotiate with them to pay you the equivalent of any travel reimbursements they used to make you, for example. Anything that your client pays you for working at home, counts as taxable income of your business, but because you will also be including it as a business cost, there will not usually be any extra tax to pay, because from a profit point of view, the cost cancels out the income.

Limited company directors

If your business is a limited company, there’s less you can reclaim from that company for working at home. In a nutshell, it’s a proportion of only the extra additional costs you incur working at home, such as an increase in your heating bill because you’re leaving the heat on all day. You’re then only allowed to reclaim the money from the company without paying extra tax if the work you’re doing at home is work that earns money for the company, as opposed to purely administrative work -- but also if you ‘have to’ work at home rather than at an alternative workplace, such as your client’s site. HMRC won’t ask for more evidence if you reclaim from your company £6 a week or less for the costs of homeworking. Yet for more than that sum, you may have to provide details of how you worked your figure out if HMRC asks.

Where Covid-19 impacts this is the question of whether contractors who are directors of limited companies ‘have to’ work from home.

The crucial ‘have to’ test

HMRC gives detailed examples here of what they consider to be scenarios where employees ‘have to’ work from home -- but these tend to be more specific to employees who are not contractors. They have also confirmed that “because of coronavirus” is a valid reason why employees might ‘have to’ work from home, as opposed to choosing to do so.

Detailed questions begin to arise when clients have to shut their offices and other workplaces, or to reduce the number of staff they have there, or if you have to self-isolate. There are also questions around where a client’s site and/or a contractor’s home are in areas under lockdown or increased coronavirus restrictions.

My view is that if you normally work at a client’s site, but that site is shut because of Covid-19, or you’ve been told by the client not to come in because they need to reduce the number of people on their premises, then those are valid reasons why you would ‘have to’ work from home. There’s no requirement from HMRC that you should try to find an alternative workspace, such as a shared office, instead -- not least because that would be ill-advised in the current climate!

You having to self-isolate would most definitely be a reason why you would ‘have to’ work from home rather than travelling elsewhere.

Translating the official advice into sole trader and PSC parlance

Due to the pandemic, all the four countries of the UK currently encourage working from home where possible, ranging from “You should work from home if you can” in England, to “You must work from home if you can” in Wales. Travel for work is allowed, but definitely not encouraged, and employers are told to do their utmost to make it possible for staff to work from home.

If you’re the director of your own limited company, the “employer” is of course your limited company, not your client, and you as an individual are the employee -- so your company, and you as its representative, would be entitled to take a firm line with clients that you should be working from home. My opinion is that you would also be entitled to reclaim from your company your costs of working at home.

Like a sole trader, whether you can ask the clients of your limited company to pay your company extra for working at home depends very much on the contract in place with them. You may be able to negotiate with them to pay the equivalent of any travel reimbursements they used to make to your company for your travelling to the client’s site, for example. Anything that your client pays your company for working at home, counts as taxable income of the company. Remember though, this may not be entirely cancelled out for company profit purposes by a claim from you for homeworking costs.

Finally, if you’re in doubt during the coronavirus crisis (or even after it) about how much to claim when working at home as a limited company contractor or sole trader freelancer, do speak to your accountant for more detailed guidance.

Wednesday 28th Oct 2020
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Written by Emily Coltman

Emily Coltman FCA, chief accountant of FreeAgent, is a graduate of the University of Cambridge. She has been working with small businesses since the year 2000 and is passionate about helping their owners lose their fear of "the numbers" and the taxman. She is the author of three e-books, "Refreshingly Simple Finance for Small Business", "Micro Multinationals", and "Very Awkward Tax"."

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