Many small businesses operate their trade from a factory unit or an office. Under such an arrangement it’s easy to see what the business is spending on essentials like rent, light and heat and business rates. Information is readily available to decide what can – and just as importantly cannot – be claimed as tax-deductible expenses against the income of the business. But what if you’re working from home?
All too often when you are self-employed it’s neither cost-effective nor practical to run your business from its own premises and it’s necessary to both administer the business and work from home.
Working at home will both increase and add expenses to the “normal” costs of running a home and so it’s reasonable to expect that some of those costs can be claimed as tax-deductible by your business. But what’s less straightforward is what proportion are expenses of the business and what’s the personal expenditure from running your home.
How to calculate the costs of using your home
All of this can sound worryingly complicated. However, HM Revenue and Customs (HMRC) have devised a simplified method of working out what expenses you are allowed to claim. It uses a “Flat rate”, based on the hours that you work from home each month. This method avoids having to, for example, divide your utility bills in detail between business and personal use.
This method can only be used if you work for 25 hours – or more – a month from home. An example:
If your hours of business use per month range from 25 to 50 hours, then the “Flat rate” that you can claim is £10 per month.
Higher flat rates are provided for higher numbers of hours of business use. It’s also important to note that the flat rate doesn’t include your telephone or internet expenses. HMRC expect you to work out the business proportion of these bills from their actual costs.
What if working from home has a greater effect on the cost of running my home?
The flat rates offered by HMRC may not reflect the real costs of running the business from home. The demands of your business may mean that working from home involves more than setting up an extra computer in the corner of the spare room, but instead requires a dedicated room or what was once the garage becomes a fully functioning workshop, complete with its own light, heat and water services. In these situations, the flat rate is unlikely to be enough to cover all of your additional costs.
Is your business taking over the house?
Time to take a few minutes and work out the effect the business has on your home.
Your actual household bills will cover all of your house. But you need to think carefully and be honest:
- How many rooms are there? HMRC allows you to exclude “normal living spaces” for example: bathrooms, landings and hallways.
- Include that garage or a conservatory, if these are supplied by utilities such as light and heat.
- How much time does your business spend in each room?
- How many of the rooms are used for private as well as business purposes?
- You cannot claim all of the costs of a room that has such a “shared” purpose.
- Be realistic. If a room is used for business only half the time, then its business use will only be 50%.
You’re working from home, what expenses can you claim?
Now that you have established the extent to which you are working from home, what can you claim?
- Light and heat, so costs of electric or gas can be included here.
- Water charges, for example if supply also includes a workshop.
- Council tax.
- Business insurance (if it is included as part of your home insurance. It may be worthwhile having separate business insurance and claiming 100% of that).
- Mortgage interest, if you are a home-owner (but take care to exclude the capital element!).
- Rent (if you don’t own your own home).
How much to claim as “Use of Home”?
The calculations may seem daunting, but are relatively straightforward:
- Add together all of your expenses for the year that you can claim, then divide that figure by the number of rooms. That gives you a cost per room.
- Then you can multiply the cost of the rooms that have some business use by the percentage they are used by your business: Cost of room x 50% business use.
- Then add up the business use figures, that will give you the Total Expense to be claimed against your business income through your annual tax return.
Don’t forget that your personal and business circumstances can change. You should review both the cost and business use per room at least every year to account for any changes.
HMRC have also produced some guidance explaining what expenses are allowable when an individual carrying on a trade uses part of their home for trade purposes.
One important thing to consider with relation to using your home for work purposes is potential Capital Gains Tax implications. However, usually if the area of the home is not used exclusively for work purposes then Principal Private Residence Relief (PPR) should not be restricted.
If you wish to speak to a member of our team, please contact us.