Posted: 11th May 2015
Working from home is growing more and more popular. After all, when you’re just starting up in business, why take on the cost of having an office?
And it makes it much easier to fit round family commitments.
But are there any tax reliefs available when you work all, or part of your time, at home? After all, you’re being kind to the environment by not commuting, and if your business was office-based then you’d be able to claim the costs of that office as part of your business expenses.
The answer is yes, reliefs are available!
But what are they and how do you claim them?
Different home-based business owners spend different amounts of their time working from home.
If you’re a piano teacher, you may spend some time teaching your pupils at your home, but you might also spend time giving piano lessons in a school, or playing the piano for ballet classes at the local dance academy.
But if you’re a jobbing gardener, the only business activity you’re likely to do at home is to write up your business books.
Yet again, every home-based business will be different.
If you’re a writer, you’ll probably have one room designated as your study and you’ll mostly work there. But on a fine day you might want to take your work out into the garden and tap away on your laptop in the sun (just watch out for low-flying pigeons).
A home-based accountant might work in a study but meet and greet clients in their living-room.
It depends on you, your home and your business!
The good news is that HM Revenue accept that every sole trader who works at home some or all of the time, will have a different set-up. So, when you work at home, you’re allowed to take a proportion of all your home running costs and put those into your expenses, so that they reduce your profit and you pay less tax.
HM Revenue know that when you’re home-based, you won’t get different bills for your business and private running costs. The Electricity Board won’t send you two bills, one for your business electricity and the other for your private electricity. So HM Revenue are happy for you to work out a proportion of your total running costs.
HM Revenue suggest you work out what proportion to use depending on how much of your home you use for business at all, and how much you’re using that part of your home for business use as opposed to private use.
I live in a house with 10 rooms.
Of those rooms, I work sometimes in my office and sometimes in my living room, on my computer. The office is also used for hobby use as a music-room, and I estimate that I use it for business 85% of the time. Since the living room is only rarely used for business, I’d estimate 10%.
(HM Revenue is happy to accept a reasonable estimate of business use. They don’t expect you to sit with a stopwatch totting up how much time you spend working in each room.)
I receive an electricity bill for £123.69. How do I work out the business element of that?
Divide into number of rooms: 123.69 / 10 = £12.37 for each room
Office use: £12.37 x 85% = £10.51
Living-room use: £12.37 x 10% = £1.24
Both rooms: £10.51 + £1.24 = £11.79
So I would put £11.79 into my accounts under “Use of Home”.
That’s a sample calculation based on the number of rooms in a house and the amount of use each room gets.
You might alternatively choose to work out the proportion based on floor area of each room. If you’re a home-based photographer with a large studio-cum-darkroom, and you use a lot of electricity in that room, then you could use floor area to work out the split between business and private use, if you think that’ll be fairer.
Just be prepared to justify how you’ve worked out the proportion if HM Revenue comes calling.
Use the proportion to work out a percentage of your:
Other costs you could include are:
Yes. Above I mentioned that I don’t use either my office or my living-room 100% for business. That’s very important.
Normally you don’t pay capital gains tax when you sell your main home. It’s exempt.
But if you use any part of your home just for business, then the exemption covering the main home will not apply to that part of your home – and you could have to pay capital gains tax.
If, instead of using my office as a music-room as well, I just used it for business, then if and when my husband and I come to sell our home, I would at the very least have to do a capital gains tax calculation to see if I had any tax to pay on that room.
So if you run your business from home, try not to use any room just for business – and try and be able to prove that if you can.
For example, if HM Revenue came knocking at my front door, I could justify that the office is a music-room too by showing them my piano set up in there.
Do I get any tax relief for not polluting the environment by commuting?
Out of luck! There’s no relief for that – although there should be if cyclists get tax relief! Let’s start a campaign!
Disclaimer: As ever this article is no substitute for professional advice tailored to your own situation. If in doubt, ask your accountant!
Emily Coltman is Chief Accountant at FreeAgent who provide an online accounting system specifically designed to meet the needs of freelancers and small businesses. You can try it for free at www.freeagentcentral.com.