With greater use of home-working now the norm for many UK businesses, it’s important to think about the deductible expenses that you may be able to claim when working from a home office.
Working from home results in us using more power, more broadband and more heating than when working from an office space, or from a co-working space outside the home. But which elements of your home expenses can you claim back? And how does the process work?
Which of the four home-working categories applies for you?
There are four groupings into which your business must fall when it comes to claiming back home office expenses: Limited Company or Unincorporated, with each claiming at either a flat rate or a higher amount.
Limited Company & Flat Rate: a flat rate of £6 per week (£4 up to 5th April 2020) can be claimed against your home expenses.
Unincorporated & Flat Rate: this is intended for unincorporated businesses (sole traders etc.) who work from home, and is broken down into three scaled categories
- If you work at home 25-50 hours/month, you can claim £10/month,
- If you work 51-100 hours/month, you can claim £18/month,
- If you work 101+ hours/month, you can claim £26/month.
Limited Company & Higher Amount: If you want to claim more than the scale rate, it’s preferable to have a rental agreement between you and your company to avoid the charges being treated as salary. The rent should be market-related – which can be difficult to establish. Because of this, the rental price is often worked out as the share of mortgage interest or rent, council tax, utilities and buildings insurance.
- If there are six rooms in the house (ignore halls, kitchens and bathrooms) and one is used for the business, then you claim 1/6th of those costs. It would be unusual for more than one room to be used for business, but could be the case if, for example, you’re a photographer with a studio and a separate office in the house.
- Note re repairs: repairs for your ‘home office’ room can be claimed back in full, and repairs for other rooms can’t be reclaimed at all. General repairs to the house (e.g. re-tiling the roof) can be claimed proportionally, so 1/6th in the example we’ve given.
Unincorporated & Higher Amount: An unincorporated business can’t charge rent as such, so no formal agreement is needed. But you can claim back an amount against tax, calculated in exactly the same way as for a limited company.
Important points to be aware of
The claimable expenses may sound reasonably simple to calculate, but there are some other important factors to take into consideration.
Capital gains tax on a property sale: The sale of a residential property isn’t normally subject to capital gains tax (CGT). But if you use one room exclusively for business, then the proceeds of the sale of that room are potentially liable for CGT. Simplistically, for example, if you have a home office that takes up 10% of the total area of the house, and the house is sold producing a capital gain of £100,000, 10% of that gain would be subject to CGT. However, if a spare bedroom with a desk is temporarily used as a workspace while the employer’s office is not accessible, this would not give rise to any capital gains tax issues.
Use of the room: If possible, try not to use any room exclusively for business. Put an exercise bike in your office room for workouts, so it’s only available for the business 90% of the time! The ‘1/6th’ in the earlier section then gets reduced by 10% and the rental agreement specifies that the room isn’t available for business use between specified hours, or on specified days.
Phone and broadband expenses: Your home telephone expenses only cover the cost of itemised business calls, not the whole bill. Your internet provider costs are not allowable as dual usage (personal and business) unless you have a separate connection for your business. Your mobile phone bill is fully allowable (so personal use is ignored) but if you’re claiming as a limited company then the mobile contract MUST be in your company name.
With more and more of us now working from home, it’s important to know what expenses you can claim for, and how much you can claim back against these home-working overheads.
Talk to us and we’ll help you calculate what can (and can’t) be claimed, and what the impact will be on your annual tax bill.