Sarah Bradford explains the tests that need to be met for relief to be available for employment expenses and the process for claiming relief.
The rules that determine whether a deduction can be claimed for employment expenses are notoriously strict and, seemingly, often defy common sense. It is not enough to incur the expense in the course of doing your job, and that alone will not guarantee tax relief for the expense.
General rule
Employment expenses are only deductible if they meet a number of very stringent conditions. A deduction from earnings is only allowed for an amount if the employee is obliged to incur and pay it as the holder of the employment, and the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment (ITEPA 2003, s 336).
There are some important points to note here.
The rule for deductibility of employment expenses is stricter than that for deductibility of expenses of a trade or profession. Not only must the expense be wholly and exclusively incurred, it must also be necessarily incurred. To qualify for a deduction, the job must dictate that the expense is incurred, rather than it being incurred because the employee chooses to incur it. The test is an objective test – an expense is only deductible if it is an expense which each and every holder of that employment would have to incur. This is a test that in practice is difficult to meet but one which the courts have consistently upheld.
The ‘wholly and exclusively’ rule limits deductible expenses to those incurred wholly and exclusively in the performance of the duties, preventing a deduction for private or dual purposes expenses. This denies, for example, a deduction for ordinary clothing, even if the clothes are worn only for work because the clothes also provide cover and comfort for the employee.
Finally, the expense must be incurred ‘in’ the performance of the duties. A distinction is drawn between expenses that the employee incurs in doing their job and those that put the employee in a position to do their job. A parent of young children may need childcare in order to be able to work. However, the childcare costs are incurred to put the employee in a position to do their job, rather than in the performance of their job. Consequently, a deduction for childcare costs is not permitted.
Separate rule for travel expenses
The general rule does not apply to travel expenses, which have their own set of rules. Travel expenses are deductible if they are incurred in the performance of the duties, or if the travel is to a place where the employee’s attendance is necessary. As with childcare costs, the costs of travelling between home and work are incurred to put the employee in the position to do their work, rather than in performing their work. Consequently, such costs (known as ordinary commuting) are not deductible, subject to an exception for attendance at a temporary workplace.
Where a deduction is allowed for travel expenses, the amount that the employee is allowed to deduct is the amount actually incurred – there is no requirement for the employee to travel in the cheapest possible way, and if the employees travel first class, the cost of the first-class ticket is deductible.
Deduction limited to earnings
The amount that an employee is able to deduct in respect of employment expenses is capped at the amount of the earnings from the employment – the deduction of expenses cannot create a loss.
Reimbursed expenses
An employee can only deduct employment expenses to the extent that these are not reimbursed by the employer. A reimbursement can be made tax-free if the expense is deductible if the employee bears the cost.
If the employer reimburses expenses for which the employee would not be entitled to a deduction if they met the cost, the reimbursement is taxable.
Home-based employees
During the Covid-19 pandemic, many employees were required to work from home. As a result, the government relaxed some of the rules governing the deductibility of expenses incurred by homeworkers. The easements applied for the 2020/21 and 2021/22 tax years only and have now come to an end. Consequently, employees who have remained working from home must meet the strict statutory tests in order to benefit from a deduction.
While is it is accepted that employees may incur additional household expenses as a result of working from home, they are only able to claim relief for those expenses where they are not met by the employer if their job requires that they work from home or their employer requires them to work from home (for example, if the employer does not have premises from which the employee can work). However, if the employee chooses to work from home, they cannot claim a deduction for the additional costs of doing so. Where an employee has a hybrid working arrangement, relief is not available if they have the flexibility to choose whether they work from home or at the employer’s premises. However, if they are required to work at home on particular days and are not able to go to the office on those, expenses incurred as a result are deductible.
The cost of travel from home to the office is similarly denied if the employee works from home. Costs are only deductible if HMRC accepts that the home is a workplace.
Employees working from home can, however, claim a deduction for revenue expenses that meet the general rule, for example, stationery costs. However, no relief is available for capital expenditure, such as the cost of a computer or office furniture, if they meet that cost themselves.
HMRC takes a harsh line on the treatment of expenses of employees who work from home, and, arguably, the legislation is now outdated and does not reflect modern working practices. However, the legislation is what prevails.
By contrast, employers can pay employees a tax-free allowance to cover additional costs of working from home of £6 per week (£26 per month, £312 per year) if they work from home. Employees who worked from home in 2020/21 or 2021/22 as a result of the Covid-19 pandemic can claim a deduction for the full tax year where their employer does not pay them the allowance, even if they did not work from home for the full tax year. The claim can be made online on the Gov.uk website.
Clothing and tools
As noted above, a deduction is not available for ordinary clothing, even if it is only worn for work. However, a deduction may be available for the cost of a specialist uniform where this is met by the employee or for items such as safety boots or a safety helmet.
Where an employee provides or repairs small tools that are needed for them to do their job, the cost of these can be deducted.
Employees using their own cars for work
An employee may use their own car for business travel, such as attending meetings with customers and suppliers. Normally, the employer will pay a mileage allowance. However, where no allowance is paid, the employee can claim a deduction based either on actual costs or at the advisory rate of 45p per mile for the first 10,000 business miles in the tax year and 25p per mile for any subsequent business miles. Where the employer pays less than this, the employee can claim a deduction for the difference.
Claiming employment expenses
There are various routes by which a claim for deductible employment expenses can be made. Perhaps the easiest way is to make the claim online using the dedicated online service on the Gov.uk website.
Claims can be made by phone (0300 200 3300) if the employee has made a claim in the previous tax year and the total expenses are less than £1,000 (or £2,500 where the claim relates to professional fees and subscriptions).
Employees can also use form P87 to make a claim. The form is available on the Gov.uk website and can be completed on screen and printed off and sent to HMRC. It should be noted that HMRC now only accepts postal claims on form P87; claims cannot be made by letter.
Where the employee needs to complete a self-assessment tax return, the claim can be made in the employment pages of the return.
Practical tip
Employees should keep records of expenses incurred in doing their job and claim a deduction where one is permitted.
