Work from home tax loophole to be closed after it cost Treasury £500 million

·6-min read
HM Revenue and Customs is preparing a report for the Chancellor after a work from home tax loophole cost the Treasury nearly £500 million - Jeff Overs/BBC
HM Revenue and Customs is preparing a report for the Chancellor after a work from home tax loophole cost the Treasury nearly £500 million - Jeff Overs/BBC

A work from home tax loophole is set to be closed after officials warned Rishi Sunak that it had cost the Treasury nearly £500 million during the pandemic.

HM Revenue and Customs is urgently reviewing a rule that allows anyone who works even a single day from home to claim a yearly sum of up to £125 in tax relief, The Telegraph can disclose.

The tax relief scheme for home workers has been in place since 2003 and is designed to help with the extra costs related to working from home, including electricity, gas and internet bills.

However, the rules were relaxed at the beginning of the pandemic to help the millions more people told to stay away from the workplace - with the tax-free amount raised from £4 a week to £6.

Instead of needing to prove they worked from home regularly, claimants were also told they could claim the full yearly sum - even if they had been told to work from home for a single day during the tax year.

The updated scheme was originally intended as a temporary measure to end in April 2021, but was then extended for 12 months. Claims can also be backdated, meaning that anyone eligible who worked from home because of Covid but never made a claim is entitled to a two-year payout of up to £250.

A HMRC spokesman said at the time: “We recognise that the working from home situation is very fluid this year and so we’re accepting claims for the full year’s expenses, even if people have only worked from home for some of the year.”

However, the cost to the Treasury is understood to have spiralled from approximately £2 million a year before Covid to nearly £500 million across the two years of the pandemic.

HMRC said 4.9 million successful claims for the tax break had been made since March 2020.

Bosses of companies that rely on trade from office workers described the tax break as a “recipe for endless home working”, after government guidance to work from home ended last week.

MPs questioned the wisdom of rewarding workers for staying at home, when many have already saved hundreds of pounds a month on train fares and other costs.

Now The Telegraph has learnt that HMRC is compiling a report for the Chancellor, which is expected to lead to changes to who is eligible for the tax relief and how much can be claimed.

A Treasury source said: “This is a tax relief that existed before Covid and it was there for legitimate reasons, but the take-up is now much higher so it needs to be looked at.”

The Office for Budget Responsibility suggested in 2020 that the scheme’s cost to the taxpayer would rise 12-fold, from around £2 million a year to £25 million.

However, figures obtained by The Telegraph show that this was dwarfed by the ultimate cost of nearly £500 million over the two years.

Telegraph analysis suggests the cost to the Treasury since March 2020 was at least £348.6 million, but the true figure is understood to be closer to £500 million because workers can backdate their claims for the past four years.

The latest figures from the Office for National Statistics showed that one in four adults reported working from home in the seven days to January 16 2022 – equivalent to 13.4 million people.

Even if all were on the basic rate of tax, the scheme carries a potential cost to the taxpayer of £836.2 million.

Demand for the tax break is also believed to have been driven by consumer experts, who have revealed the existence of the scheme to those who may not have previously been aware.

Martin Lewis, the founder of advice website MoneySavingExpert, made one social media post which said:

Just days ago, the Gov.uk Twitter account was encouraging home workers to come forward and claim the cash:

The Tory MP Kevin Hollinrake, a member of the Commons Treasury Committee, said: “It is often in people’s financial interests and personal interests to work from home, so it doesn’t seem appropriate that there should be tax relief for those who choose to work from home rather than being forced to do so.

“It’s important that we get people back to workplaces, rather than giving them any incentive to work from home.

“Lots of businesses rely on those people being at work, and it’s good for people to be at work because that’s where you learn. So for societal and economic reasons, it doesn’t make sense to have a tax break.”

Kate Nicholls, chief executive of UK Hospitality, said: “This is a distortion in the tax regime that encourages a culture of working from home. It should be scrapped urgently.”

Sir Robert Buckland, the former justice secretary, said: “It’s a tax relief that was designed for a very different era from the one we have been living through.

“A lot of people have actually saved money by working from home, and at a time when the Treasury needs to harness all the extra money it can, it is a sensible time to close this loophole.”

Mel Stride, chairman of the Commons Treasury Committee and a former minister, said: “Clearly this is something the committee will want to look at closely and monitor to make sure that any proposed changes are sensible in terms of being fair to taxpayers but equally supporting the public finances.”

An HMRC spokesman said: “Tax relief for working from home is there to help people with the additional household costs of having to work from home. It has been a key form of government support for millions of workers during the pandemic.”

A Treasury spokesman said: “The Home Working deduction has been in place since 2003 to support employees with the additional household costs of working from home. Since then it has formed part of a wider support package for individuals during the pandemic.

“There are no plans to reform this deduction but we keep all taxes under review and closely monitor their value for money.”

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