Some employers have made, or intend to make, payments to employees to reimburse costs incurred by their employees working from home during the COVID-19 pandemic. Inland Revenue has clarified the tax treatment of such payments made from 17 March 2020 to 17 September 2020.
IR has issued Determination (EE002) as a temporary response to the COVID-19 pandemic only. It applies for a six-month period and the treatment it provides depends on an employee continuing to work from home (in a more than minor way) as a result of COVID-19.
The intention is to remove some of the difficulty in assessing the appropriate tax treatment and reduce compliance costs for employers by providing some safe harbours. You do not have to apply this Determination. You can calculate tax-free allowance and reimbursement amounts under s CW 17 of the Income Tax Act 2007 based on your own reasonable estimates or actual employee costs.
To be applicable:
- An employer must make a payment to an employee.
- The payment must be for expenditure or a loss incurred (or likely to be incurred) by the employee.
- The expenditure or loss must be incurred by the employee in deriving their employment income and not be private or capital in nature (the capital limitation does not apply to an amount of depreciation loss).
- The payment must be made because the employee is doing their job and the employee must be deriving employment income from performing their job.
- The expenditure or loss must be necessary in the performance of the employee’s job.
- The expenditure or loss must be incurred by the employee as a result of the employee being required to work from home because of the COVID-19 pandemic.
It can apply to an employee who is partly working from home and partly outside of their home, provided that the home-based work is more than minor. For example, an employee who works at the employer’s premises on alternative days to cater for physical distancing policies.
Exclusions
It does not apply to:
- Expenditure on account of an employee.
- Any payments made for a period after an employee ceases to work from home.
- An amount paid under a salary sacrifice arrangement.
- To a payment made to an employee to compensate the employee for the conditions of their service.
Not binding on employers or employees
An employer or employee may treat a different amount paid to the employee as exempt if they have evidence to demonstrate that in their circumstances some other amount is appropriately treated as exempt income.
You may find the chart here helpful, or you can read the full Determination here. Or get in touch with us and we’ll help you determine what’s best for your business.