Establishing what can be claimed is particularly important for any new business and in this article, we look at what you may be entitled to. As you will see, determining if an expense is allowable can be complicated and we would recommend discussing this with us to ensure you claim everything you are entitled to claim.
One thing you will see is that the rules which apply to a business being run through a limited company differ to the rules which apply to a sole trader. The decision as to whether you trade through a company or not will itself have a big impact on you tax position and should also be considered.
Working from home for the self-employed
The basic rule for the self-employed is that you can claim expenses which are wholly and exclusively for the purpose of your business. This means that when you work from home you may claim a measure of relief, which must be restricted for your personal use. Typically, you could claim a proportion of your costs for things like heating, electricity, Council Tax and mortgage interest or rent.
HM Revenue & Customs (HMRC) will accept a sensible, reasonable and logical method of calculating the costs and have suggested that the following factors are considered:
- How much – in terms of area – of the home that is used for business purposes
- What utilities, such as electricity, have been used for your business
- How long it is used for business purposes
Alternatively, you can use a simplified method to calculate your use of home using HM Revenue & Customs (HMRC) approved flat rates. You can only use these simplified expenses if you work for 25 hours or more a month from home. The flat rate doesn’t include telephone or internet expenses. You can claim the business proportion of these bills by working out the actual costs.
We can help you work out which method is most beneficial to you.
Working from home for employees
For an employee, the treatment of home working expenses depends on whether the employer makes a payment to the employee.
To make a claim for relief as an employee, you normally need to be required to work from home under your contract of employment. In most cases, any claims by an employee will need checking and professional advice should be sought prior to making any claim.
The good news is that if your employer chooses to reimburse you for the additional costs from working at home, these costs can often be paid tax free where the reimbursement is no more than £4 per week. If reimbursement is no more than this, less records need to be kept to prove the expenses. If more than £4 is paid, agreement should be sought with HMRC and the costs must be justified, and detailed records will have to be kept.
Working from home for company owner-managers
When a company owner-manager works from home, then a ‘use of home’ claim cannot be made by the company as the home does not belong to the company. Equally, no HMRC-approved flat rate expense may be claimed, as these are not allowed by companies.
Instead, the company may be able to reimburse the owner-manager £4 per week or they may be able to charge the company a rent for the use of the home.
Where the company decides to make rental payments to the director, a non-exclusive rental agreement between the company and the individual should be put in place and the owner-manager must then report this rental income on their tax return. On their personal return, they can then claim a portion of relevant expenses. Where an owner-manager pays rent or has high mortgage interest payments, this can be beneficial. No deduction may be claimed for mortgage capital repayments. In addition, there is a special £1,000 property allowance and this allowance is not available between connected persons.
For most company owner-managers, we often recommend reimbursing £4 per week to avoid complicated calculations, record keeping and disclosures.
Working from home restrictions
There are instances when a claim could impact on tax relief when you come to sell your home. Generous reliefs are available which mean that when you sell your home, you will not generally pay any tax on the gain, provided you lived in the property as your home throughout your ownership and you had no other homes.
However, where part of your home is used exclusively for business purposes, this relief will not apply to the business proportion of the gain and you could end up with a tax charge. The good news is that HMRC makes clear in its guidance that occasional minor business use is ignored.
As you can see, there are many possibilities and opportunities to make a claim for the use of your home, but care is needed to make sure you stay within the rules and make the most efficient claim.
We would be happy to discuss your plans in more detail and outline the possible allowances available to you. To make a free, initial consultation, please call 0800 0523 555.
By Andy Gibbs ATT, CTA
Last updated October 2019
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.