It pays to do your homework

Working from home is becoming the environment of choice for whole swathes of the labour force. According to the Office for National Statistics, at least a quarter of all workers, or 6-7m people, sometimes operate from the domestic sphere.

The lifestyle benefits are clear. And employers are happy because office cost-savings can be extensive.

But people should make sure they get the most out of the arrangement from a financial perspective. There are important insurance and tax implications to consider.

First, anyone who works from home, even if it is just taking a report home to finish, or if you are working from home while waiting for the dishwasher repair man to appear, must tell their domestic insurers. Your cover could be invalidated if you fail to do so.

Most insurers will accept home working, involving say a computer, fax and printer, without adding extra cost, as long as they are told about it.

Fay Tebbett, a director of Sterling Insurance, says insurers may draw the line at more specialist equipment. So a graphic designer with a non-standard computer, specialist software and high resolution printers may need a specialist homeworker policy.

Norwich Union, Cornhill and Axa all offer this type of cover. Homeworker policies include business interruption insurance, public, product and employer liability, and are aimed largely at the self-employed.

People running a full-blown business from home - say a designer knitwear firm, from a shed in the back garden - will probably be better off with straightforward commercial insurance.

If the business equipment you use at home belongs to your employer, then it should be insured by the company.

Employers owe a duty of care to carry out a risk assessment of the home workplace.

According to Trevor Davies, senior partner at insurance law firm Davies Lavery, if there is an accident connected with the home workplace, even if the worker uses his own equipment, the employer could be found liable, in the absence of an adequate risk assessment. There could also be contributory negligence on the part of the employee.

To find out what your company should be doing for you, visit the Health Safety Executive website: www.hse.gov.uk/pubns/indg226.pdf

Davies recommends that companies visit homes to check for safety and security, or they ensure employees are adequately trained to assess the risks themselves.

Where people work from home only rarely, employers such as Norwich Union have a questionnaire approach to try to spot risks.

To be able to write off expenses against tax, employees working from home for all or part of the time need to be able to show that anyone doing the job would be expected to work in that way.

Inez Anderson, a partner at People Services KPMG, says: “It can be difficult to prove it’s [working from home] required. But it’s becoming more and more common.” She says a convincing argument to put to the Inland Revenue is that the employer does not have the space for people to work from the office.

Travelling from home to work is considered travel between two places of employment, and is therefore tax-deductible - as long as it can be shown that people must work from home as part of the job.

On the same basis, employers are allowed to give workers £2 a week tax-free towards their household bills, to cover the extra cost of working from home. Proof of spending is not required, but receipts may be needed to get tax-free-reimbursement from the company for expenses such as telephone calls.

Mike Crellin, a tax manager at Hacker Young, says the Revenue imposes National Insurance on some payments from the employer. So if, for example, you have an ISDN line put in, it may be worthwhile persuading the telephone company to bill the company direct. He says the tax man is more relaxed on the cost of actual phone calls.

Remember there is a potential tax liability if you use the work computer for your own purposes.

Employees and the self-employed alike should be aware, however, of the limits of what they should reclaim. A proportion of utility bills is fine, as is office equipment and furniture - in fact anything that you must have for your business. But beware of including items you would have to pay for even if you were not working from home, such as mortgage payments, council tax or buildings insurance. You could end up having to pay capital gains tax on the proportion of the gain relating to your office when you come to sell the house.