Mark McLaughlin looks at when employees can claim tax relief for costs of living near their employer.
More employees than ever seem to be working from home. However, in many cases it is not possible for employees to perform their employment duties at home, so they must work at their employer’s business premises.
Living closer to work
If an employee lives some distance away from a workplace, they may decide to move closer (e.g., a temporary placement at a different location).
It might be assumed that the cost of (say) renting a flat near that location would be allowable for tax purposes; but is it?
High hurdle
A tax deduction is generally allowed if the employee is obliged to incur and pay the expense, and the amount is incurred ‘wholly, exclusively and necessarily’ in the performance of their employment duties (ITEPA 2003, s 336).
In the context of living costs, HM Revenue and Customs (HMRC) recognises it may sometimes be necessary for an employee to live near work, potentially resulting in the employee incurring extra living expenses over the amount they may have otherwise incurred.
HMRC accepts (in its Employment Income manual at EIM32505) that if the cost of travel to that workplace is deductible under special rules for travel expenses (ITEPA 2003, ss 337-340), accommodation costs attributable to that travel are also deductible. Otherwise, the extra living expenses are not deductible under section 336. The travel expenses rules are beyond the scope of this article, but are restrictive; in many cases, tax relief for accommodation costs may be denied or limited.
Too far to commute
For example, in Kunjur v Revenue and Customs [2021] UKFTT 362 (TC), an established dental surgeon wished to become a maxillofacial surgeon, but the only available position was in South London. The taxpayer’s family was established in Southampton. The training was from October 2012 to October 2016. He initially tried travelling by car from Southampton, but quickly realised that commuting was unrealistic.
The taxpayer subsequently obtained very modest accommodation in South London, which was convenient for work. He stayed at the accommodation during the week and one weekend in six to discharge his formal on-call duties. He drove to Southampton on Friday and returned the following Sunday to begin work on Monday morning.
HMRC refused the taxpayer’s tax relief claim for accommodation costs. However, the First-tier Tribunal (FTT) noted the taxpayer was obliged to live near the hospital so he could perform his on-call duties. The FTT allowed a proportion of accommodation costs by reference to the amount of time the taxpayer spent giving advice from the accommodation while on-call.
HMRC may well appeal this decision, as the taxpayer’s costs would not have been allowable under the travel expenses rules because (among other things) his four-year period of work in London was longer than permitted under the travel expenses rules.
However, on the ‘wholly, exclusively and necessarily’ test, the taxpayer conducted research and prepared articles during the week as required by his employment, but there was no requirement for him to be so close to the hospital on those occasions. Tax relief for the accommodation costs was restricted accordingly.
Practical tip
Aside from accommodation costs such as rent, employees working from home on a regular basis may be able to claim tax relief for additional household costs (e.g., gas and electricity) relating to work. There is also an exemption for certain homeworking payments (ITEPA 2003, s 316A), but this relates only to employer payments.
