Tax and Working From Home

Posted: 18^th November 2015

When starting out in business, you might decide to operate your business from home. The cost of renting space is prohibitive for a new business and the convenience of being able to switch between business proprietor and mum at a moment’s notice is beyond price! If you do have your office or workshop at home, what expenses can be claimed against business profits for tax purposes?

To be tax deductible, an expense must be ‘wholly and exclusively’ incurred in connection with the trade or profession. This compares favourably with expenses claims for employees, who must also prove that they incurred the expense ‘necessarily’ –which can be difficult at the least, and is often impossible! Strictly speaking, an expense which is incurred for both business and private purposes is not tax-deductible, unless the business proportion is separately identifiable and clearly this could be applied to household costs. However, guidance issued by HM Revenue & Customs in February 2015 shows that a proportion of the running costs of the home will be allowed provided that the business element is not excessive and has been calculated on a reasonable basis.

Which type of expenses?

The types of expenses that may need to be taken into account include:

• rent;
• heating (e.g. gas and electricity);
• cleaning (e.g. window cleaning, domestic cleaners);
• council tax;
• buildings and contents insurance;
• water and sewerage rates;
• repairs and maintenance to the house;
• business rates; and
• garden expenses (if customers visit the property regularly and/or use the garden)

In addition, repairs and decoration of the area used for business purposes are claimable in full.

How much should I claim?

Your bills will, in the most part, relate to expenses for the whole property, so how do you calculate your claim? Unfortunately, there is no standard method used by all accountants and accepted by HM Revenue & Customs –if only life were that easy!  One way you could calculate the business element is as follows:

1. count the number of rooms in the house (but exclude areas like the hallway, bathroom and toilet unless used regularly by visiting customers); 
2. work out the proportion of the house used for business purposes (you could calculate this by reference to the floor space used or the number of rooms).
3. add together all the relevant household expenses incurred during the period in question (ie. those with ‘mixed’ business and private use); 
4. apply the business proportion calculated in (2) to the total expenses in (3) to give the business proportion of ‘mixed’ household expenditure;
5. if the area used for business is not exclusively used, i.e. the room is used for private use when not being used for business, the figure at (4) will need to be further adjusted (you will have to estimate a bit here but have a stab at a reasonable adjustment!).

You can then add on any expenses incurred only for business purposes (e.g. painting the office area) to give you the total ‘use of home’ claim.

In some cases it may be more appropriate to make a separate apportionment of certain costs to reflect actual use, for example if your trade is one which utilises lots of electricity or water.

To make the claim, you need to put the figure on the Self Employment pages of your Self Assessment Tax Return. You might want to explain how you reached your figure in the ‘additional information’ box as this can sometimes deflect an enquiry by the Inspector who doesn’t then need to ask where the figure came from.

A couple of don’ts!

1     Don’t use a room exclusively for business

If you use part of your home exclusively for business, you may not be entitled to full relief from capital gains tax when you sell your home. If possible, it is best to avoid exclusive use. If your office or workshop is available as a room for guests to sleep in, your children to play computer games in or for storage of personal items, then use isn’t exclusively business and full private residence relief should be preserved. The tax saved by making a ‘use of home’ claim can begin to look very modest compared to the capital gains tax bill which could arise if the value of the house has increased significantly and a proportion becomes taxable!

2     Don’t claim a ‘round sum’

Claiming a ‘round sum’, e.g. £5 per week will leave you open to attack by HM Revenue & Customs. The claim for expenses should be based on a reasonable calculation of the true costs, albeit that these have to be a bit of a ’guesstimate’! A round sum claim may be questioned by the Revenue, may be difficult to support and could trigger a full enquiry into your accounts, with the associated professional costs as well as additional tax, interest and penalties.

Trading through a Company

If you have chosen to trade through your own company, remember that, as a director, you are treated as an employee for tax purposes. This means that any expense you incur personally has to be ‘wholly, exclusively and necessarily’ incurred to benefit from tax relief, rather than the easier ‘wholly and exclusively’ test applied to the self-employed. It is possible to structure expenses between director and company to maximise relief for the company and minimise taxable benefits for the director. In some cases, a rent paid by the company to the director might be recommended.

Finally..

This article is a general guide to claiming for household expenses when working from home. The basic rules are:

Keep your claim within sensible and supportable limits

• Don’t just pick a figure –do your calculations (and keep them in case they are asked for!)
• Don’t use part of your home exclusively for business if you can avoid it
• If in any doubt as to what you should claim, seek professional advice –it can save you time and money in the long run.