As all contractors are aware, claiming expenses is a great way of reducing your annual tax bill. 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 more of a grey area, one fewer contractors choose or are able to take advantage of. To claim for Use of Home as Office Expenses, as a director or employee of a limited company, you must undertake substantive duties related to the main trade of your business at home and furthermore be unable to carry out these duties at your client’s site. So, if you could work at our client’s site but choose to work from home then the tax relief is not available.
HMRC allow a flat rate claim of £4 per week for home expenses without the need for keeping receipts but it is possible to claim more for home expenses. 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 two convenient species: the accidental/kitchen table home worker and the dedicated home worker.
- The accidental/kitchen table home worker has no distinct office and doesn’t consider himself to be a home worker, but he frequently works on his business, tidying up loose ends or organising his admin and expense claims for the week, at home. This can gradually evolve until he is working from home on a more regular basis. They’ll often clear some dedicated space in one room to use as 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. They may work predominantly at their client’s site but will also be required to complete some business at home, which they are not allowed to do on site.If this is how you define your home working activities, you should be able to claim the fixed amount of £4 per week (£18 per month) without any undue attention from HMRC.
- 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 and you will be carrying out substantive duties relating to the business of your company at home e.g. an IT Consultant may occasionally work at a client’s premises but may also design, develop and market software from home as part of the company’s business.
So here’s the important part: whether you are a member of these 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, you need to figure out exactly what you can claim, and how you measure it. You can find some HMRC examples of claiming for home working expenses here.
2. Understand what you can claim as home office expenses
If you want to claim for more than the fixed weekly amount, and you use part of your home for business, you can claim for expenses incurred “wholly and exclusively” in the performance of your duties. This means that you can 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 therefore cannot be claimed. They include costs such as, Council Tax, mortgage interest, insurance, general repairs and rent.
- Running costs relate to expenses where the bill may vary with the amount of business use. They include telephone calls, metered water, cleaning and 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? For costs such as electricity and gas the total cost should be apportioned by room. Therefore if your house has five rooms of approximately equal size, and one of them is used as a home office, then 20% of your heating and lighting costs can be claimed for business usage. For costs such as telephone and broadband, a percentage can be used to split the amount between business and personal use.
- Time: how long is it used for business purposes, compared to any other 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, let’s say that you have a total figure of £4,000 that you are going to apportion. If your house has 6 rooms and you use one room, then 1/6th is apportioned, i.e. £667. If you work 10 hours per day then you apportion the costs for that room for business usage, i.e. 10/24. Therefore £667 x 10/24 = £278.
If HMRC ever carried out a check on your accounts, they would expect you to be able to produce detailed calculations and relevant invoices relating to your claim.
4. Renting a Room to your Company
A final option is to set up a rental agreement between yourself as an individual and your limited company. You can then charge rent to your company and include a proportion of your mortgage interest or rent that you pay on your home. The rent charged must be commercial, you must have a room in your home dedicated to your business and there should be a formal rental agreement in place. You must be aware that if you choose this route, the rental income you receive must be included on your self assessment tax return and it may lead to a partial restriction for the Capital Gains Tax relief available when you sell your only or main home.
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.
Whether you’re just starting up, stepping into a new sideline or a long time contractor, we understand that your work is constantly evolving and changing. With innovative software and clear advice from our friendly experts, we ensure all our clients can simply manage their accounts with confidence; no matter what they’re working on, where they are or who they’re working with.