Working From Home? What You Can And Can’t Claim As An Expense
One of the greatest benefits about being self-employed is you’ll get the chance to work from home. Because of this flexibility, a lot of people are inspired to start their own business. Furthermore, this is more suitable for people who think that a nine-to-five office job is not suitable for them, for instance, people who are living with disabilities and stay-at-home parents.
Are You Using The Office In Your House For Work? – What Can You Claim?
Most often, it will depend on the work that you do. You could potentially reclaim expenses for using your home as an office. This can be done either by claiming expenses for office equipment such as furniture, cabinets, computers, printers, etc. or by claiming the rent for the part of your home. HMRC rules are a bit complicated, so we have broken them down so it will be easier for you to realise what you may or may not incorporate in your expenses when working from home.
How To Claim Home Office Expenses
Running your own business has a lot of perks. First of all, you can choose the people whom you want to work with. Then, you can choose where you want to work. If you are using a particular room in your home as your office space for managing your business, then you are allowed to claim for specific costs as a business expense.
Obviously, there are certain rules that must be followed. You need to prove that you constantly spend time in this office space doing your work. Hence, you are not just using your home office for small works while most of the work is accomplished on-site or at your customers’ offices.
Tax relief can also be claimed when you purchase equipment that is essential and needed for your professional duties. You are further allowed to claim reasonable relief for the expenses of furnishing or equipping an office, for instance, bookcases, furniture, chairs, etc.
HMRC rules on what you can claim as expenses are complicated and vary for sole traders and limited companies.
How Much Can Be Claimed As Expenses Through Limited Company When Working From Home?
If you have a limited company, then there are two methods that you can use in working out with your home office expenses. You can either use the flat-rate amount from HMRC or make a rental agreement between your limited company and yourself.
HMRC Flat Rate For Limited Companies
If you want to use the easy way of calculating your home office expenses then you need to use HMRC’s declared allowance for the extra costs of operating your business from home. There is no need for keeping the receipts in order to prove your expenses. Consequently, you will be able to claim£6 per week or £312 for the 2020/21 tax year. For the 2019/20 tax year, it was £4 per week or £208 per year.
This can be covered as an allowable expense together with the other expenses that you will be claiming. Another benefit is that HMRC does not consider this as a “benefit in kind”. This means that you don’t have to pay any tax on the amount through your Self Assessment.
Renting Your Home Office To Your Business
If you are operating a limited company, then it is possible that you will rent your office space in your home to your limited company and claim for its cost.
Hence, if you are managing your business through your limited company, and have followed all the rules accurately, then you can probably claim more than £312 each year.
Rental Agreement With Your Limited Company
If you want to claim a higher amount, then all you have to do is create a rental agreement between yourself and your limited company. In case you did not create this formal agreement then HMRC might classify the rental from your limited company as additional income and might be subject to tax and National Insurance.
Setting up a rental agreement is advantageous to your limited company since you can deduct the rental payments from your pre-tax profit. This means that you won’t be paying Corporation Tax for these expenses.
When preparing for your rental agreement, there are some things that you need to keep in mind:
- When it comes to the amount of rent, make sure that it is realistic. The amount should be appropriate commercially. Also, both parties should not feel disadvantaged by the agreement. Hence, the amount of rent should not be intended to benefit you being the owner of the home or influence the profitability of your limited company.
- Avoid creating a room in your home that is exclusively designed for your business since this can have a huge implication when the time comes that you want to sell your house.
- A formal rental agreement should be created and signed by both parties.
- There should be a periodic review on the rental payment, for instance, you can probably evaluate this annually.
Whatever income you obtain as an individual should be included on your personal tax return when conducting Self Assessment. Also, whatever profit is left after deducting the expenses will be subject to income tax using the usual rate. It seems that this is a less tax-efficient choice for you personally.
The rental agreement can help you in covering the proportional expenses of the rented space. Actually, there is no comprehensive list when it comes to the allowable expenses, hence, whatever is considered allowable will greatly depend on the circumstances for each case. However, there are some items that you can include like utilities, mortgage payments, and council tax depending on the proportion of the property utilised for business purposes.
How To Compute Your Allowable Rental Expenses
If you want to ensure that your rental amount is reasonable enough, then you have to make some computation on the office space being used by your business. The most practical way of doing this is to compute the monthly expenses that you are allowed to claim. Afterwards, divide this by the percentage of the rooms being used for your business, most often, this is only one room.
For instance, if your house has seven rooms and one room is used as an office, then you have to compute your rental amount based on 1/7th of the allowable expenses. If you use your office seven hours per day, then compute 7/24th of the amount. The result will be the rental amount that you have to put on your agreement.
Nevertheless, if you want to sell your property then you may be required to pay Capital Gains Tax which can also be included on your Self Assessment. The reason behind this is that the “business” portion of the sale will not be eligible for Private Residence Tax Relief. This is due to the fact that your home is not completely exempt anymore since a portion of it is being used for business purposes.
In case there is an increment in the value of the office area, then Capital Gains Tax may be applied. Most often, this is a result of the company’s occupation.
So, when it comes to setting up a rental agreement, you have to think about it real hard. You should ask yourself if this is the right choice for you. In case you want to sell your house in the future then you will have pay for the Capital Gains Tax of the office area since this is not covered by the Private Residence Relief.
You might find the computation a bit complex and it is possible that the Capital Gains Tax liability can be lessened in case you are using your office for non-business activities outside office hours. It looks like you will be needing the help of a specialist when it comes to computing the amount of Capital Gains Tax that you have to pay in order to guarantee that you are following HMRC’s rules.
How To Claim For Multiple Rooms?
If you want to use more than one room for your business, then be sure that you provide an excellent reason for it. You are also required to provide some proof that the use of this space is only secondary to business use. A good example would be a photography studio wherein a dark room and an office are needed. But bear in mind that when you decide to sell the property, you will have to pay for its Capital Gains Tax.
If you will be using several rooms for business purposes, then it’s best if you will prepare a detailed computation along with some supporting documents. In doing this, the process mentioned above must be followed. If you want to go further then you can allocate expenses depending on the square metres being used as an office.
You are also given the chance to claim back repairs on your property in case they are directly related to your business and it is essential for its operation.
How To Claim For Home Office Expenses If You Are A Sole Trader?
The rule for claiming home office expenses for a sole trader is a bit different. You will be given options. Either you will claim simplified expenses designed for the self-employed or you can choose to claim based on the actual costs by computing the portion for personal and business use for your home. For instance, the percentage of the utility bill used by your business.
In order to help you choose the best method to use, you can visit the government’s website www.gov.uk and refer to their simplified expenses checker.
By using the simplified expenses for the self-employed, you are allowed to claim a flat rate for your qualified expenses depending on the number of hours that you have worked from home every month. You can only qualify if you have worked from home for at least 25 hours every month.
If you choose to use the simplified expenses, then you are allowed to claim the business portion of your internet or telephone expenses since they are not incorporated in the flat-rate allowance. The flat rate per month will greatly depend on the number of business hours used each month. A flat-rate allowance of £10 is used for business hours between 25 and 50. £18 is the flat rate used between 51 and 100 business hours each month. And finally, for 101 hours and more, the flat rate is £26.
Using the Internet When Working From Home
Remember the entirely and necessarily rules? If you want to claim for your internet expenses, then make sure that the internet connection is bought under the name of your limited company. Typically, you won’t be able to make any claim for internet expenses since it will include your personal use.
On the other hand, if you are working at home and you have set up a rental agreement for your business, then this expense can be considered as part of the rental computation.
However, there is an exemption. In case you have installed a separate broadband line that is solely for the office space of your home, then you are allowed to claim for these internet costs.
How To Claim For Mobile Telephone Calls For Business?
If you want to claim complete tax relief for your mobile telephone bills then you have to make sure that you have set up a contract between your company and the service provider. This is a great way of obtaining complete tax relief on phone costs as well as its usage. If you made personal calls using your mobile then it can be considered as a tax-free benefit in kind. Hence, this is a consequence of a permissible business expense and there will be no tax imposed on it. Also, you don’t need to report this on your P11D.
By taking out a mobile phone contract under the name of your business, your monthly payment will be considered as business expenses. In case the full balance of your mobile phone, as well as its contract, is £1,000, then this can be treated as an allowable expense in your accounts. The taxable profit of your business will be lessened as well as the Corporation Tax that you need to pay will be lessened by £190. Take note that this amount is applicable for the 2019/20 and 2020/21 tax years.
If you are not a limited company but rather a sole trader, then your sole trade profits will be lessened so as your personal tax payment. Additionally, bear in mind that the personal use of your phone is treated as a tax-free benefit in kind. Hence, you won’t be taxed for it through your Self Assessment.
Signing a phone contract using the name of your company can be tricky since you will be using one of your phone provider’s business taxes which can be a bit expensive. However, any increment in cost will apparently be included in your tax savings.
Also, it is not recommended that you should claim business use on your personal mobile contract since you won’t be able to claim any taxes based on the payment for minutes. This is because these minutes are already incorporated in the contract and it has no recognisable cost.
How Can Employees Claim Expenses When Working From Home?
Working from home is not only for those who are running their own business or those who are self-employed. In fact, there are several employees who are working from home most especially due to the Coronavirus pandemic. Employees who are working from home are still qualified in claiming £6 per week from their employer or instantly from HMRC. Take note that you can only claim this from your employer if they are willing to pay you.
The most important question that you need to ask yourself during each process is, are these expenses intended for business purposes? Are there ways that you can prove it?
Just like any other issues, if you are having some doubts then it’s best to contact a qualified accountant that can help you.