As all contractors are aware, claiming expenses is a great way of reducing your annual tax bill, and when it comes to familiar items like business mileage, office supplies and client lunches the rules are pretty black and white: there’s no limit to the amount of genuine business expenses you can claim every month providing you’re familiar with HMRC’s guidelines.
However, claiming home office expenses is a bit of a grey area and one that fewer contractors choose to take advantage of, perhaps because HMRC allow a flat rate claim of only £4 per week for incidental home expenses! But if taking the trouble to claim £4 doesn’t float your boat, it is certainly possible to claim more for home expenses – and you don’t need to operate a full-blown home office to do so. Here’s the low down on how to squeeze the maximum tax savings from your home working and, more importantly, how you can apportion between business and private home expenses.
1. Define Your Home Working Activity
For the purposes of this activity we’ve pigeonholed all home workers into three convenient species: the accidental home worker, the kitchen table home worker and the dedicated home worker.
- The accidental home worker has no distinct office and doesn’t consider himself to be a home worker, but he frequently throws the kids off the PC to tidy up a few loose ends or organise his expense claims for the week. The accidental home worker is probably not even claiming his three quid’s worth of no questions asked home expenses, let alone anything greater.
- The kitchen table home worker often begins life as a member of the accidental species and gradually evolves until he is working from home on a more regular basis. The accidental home worker often clears some dedicated space in one room to use as a work area, but it’s probably not exclusively used for business. For example, it may store domestic and private belongings, or double up as the kitchen, bedroom or garage.
- The dedicated home worker regularly (or always) works from home in a more clearly defined ‘office’: whether this is a converted garage, a free standing garden studio or a spare bedroom doesn’t matter, the important bit is that this room is primarily used as a work space.
So here’s the important part: whether you are a member of the above groups or any other sub-species, it is possible to save money by claiming for home working expenses, as long as you follow the rules. In order to do this to need to figure out exactly what you can claim, and how you measure it:
2. Understand what you can claim as home office expenses
If you use part of your home for business, you can deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation. However, you can only deduct a figure that relates to business usage, which must be clearly separated from private usage. Home expenses broadly fall into two categories: fixed costs and running costs.
- Fixed costs relate to the whole house and have to be paid even if there is no business use. These include costs such as, Council Tax, mortgage interest, insurance, general repairs and rent. If part of the home is set aside solely for business use for a specific period then a part of these costs is allowable, these will need to be apportioned by area and time (see next section for details).
- Running costs relate to expenses where the bill may vary with the amount of business use. They include telephone line rental, broadband, cleaning, heat and light. HMRC officers are now instructed to “accept a claim based on any reasonable basis” provided that apportionment is based on usage.
3. Measuring Your Usage
In their perfect world, HMRC might ask you to separate private home expenses from your business ones by measuring out your electricity usage by the watt and apportion it accordingly. But in the real world they realise that people may find this slightly impractical, so they have produced guidelines to dictate how to apportion home expenses correctly.
- Area: what proportion in terms of area of the home is used for business purposes?
- Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
- Time: how long is it used for business purposes, as compared to any other use?
|Electricity & Gas||By room, square metre, or on the metre||For example, if your house has five rooms of approximately equal size and one of them is used as a home office, then 20% (one fifth of the electricity bill can be claimed for business usage|
|Telephone||By percentage||The claim for line rental should be based on the ratio of business use to total use and the overall claim should reflect all aspects of use, including incoming calls.|
|Rent||By room or square metre||Rent can include council tax, insurance, mortgage interest and even cleaning bills, and should be claimed according to the amount of space you use solely for business (as with electricity and gas)|
|Repairs and Renovations||By ‘purpose’||If you have business equipment you keep at home, for instance a PC, you can claim for repairs. You can also claim for renovations ONLY on rooms that are used for business purposes. For example, if you have the dining room and the study/office redecorated but you do not use the dining room for business you cannot claim the full redecorating costs.|
|Fixtures and Fittings||By ‘purpose’||Any claims in this category must be restricted solely to business items: for instance, if you need some shelving for business publications, the cost can be claimed.|
|Broadband||By percentage||As with the phone line, the claim should be based on the ratio business use versus personal use, but relating specifically to broadband time|
Percentage of time in use
As well as working out the percentage of your house that you’ve dedicated to business, you may also need to time apportion some expenses. Using an example, lets say that you have a total figure of £10,000 that you are going to apportion. If your house has 6 rooms and you use one room, then 1/6th is apportioned, i.e. £1,667. If you work 10 hours per day then you apportion the costs for that room for business usage, i.e. 10/24. Therefore £1,667 x 10/24 = £694.
Or, to quote HMRC directly: “… it is possible to apportion the use and cost of a room on a time basis, and to allow the expense of the room during the hours in which it is used exclusively for business purposes, in the same way as it is possible to calculate the business expenses of a car which is sometimes used for business purposes exclusively and sometimes used for pleasure.”
If in doubt…
Hopefully all this makes it crystal clear how, and what, to claim for business expenses, but if you’re in any doubt the best advice is, of course, to have a chat with your accountant, who will be familiar with the many quirks, case studies and disputes that have arisen in the past relating to home expenses.