Claiming tax deductible expenses for working from home or running a home office is a legitimate way to be reimbursed for the costs incurred by you personally for things such as electricity, council tax and rent.
There are however a few things we need to be very, very careful of so we'll start with these.
Let's start with what we want to avoid.
Charging a market rent.
While you may feel justified in charging your business a rent equal to that of a similar space in a serviced office you will not benefit by doing so.
The reason this is a bad idea is that if the amount you charge your business exceeds the cost of providing the space then you would need to declare the profit generated as income on your next self-assessment and pay tax!
It would work like this; you charge your company £500 per month for use of a spare bedroom.
The cost to you personally of providing that space (based on percentage of property) for mortgage interest, council tax, electric and water rates is only £200 per month.
You therefore profit £300 per month or £3600 per year which you need to declare on your personal tax return and pay tax at whichever rate band applies to you. Not very efficient.
Claiming 100% Business Use.
Here we must be very careful as claiming 100% business use for even a proportion of your home will reduce the private residence relief (PRR)you get when selling your home. PRR reduces the capitals gains tax you pay when you sell your home and in normal circumstances when selling your main residence PRR results in 100% CGT relief. However that’s not the case if you allocate part of your home for business use 100% of the time.
For example. You allocate the same spare bedroom to business use and claim back as a business expense all the incurred running costs for providing that area to your business (£200p/m in our example).
If you claim 100% of the costs then you are effectively stating that the area is for business use 100% of the time. This being the case you can’t claim PRR on that area of your home because its no longer a private residence. Depending on the size of the area as a percentage of your home this could have a significant impact on your CGT liability should you sell your home.
How best to make a claim?
We obviously want to avoid the two scenarios above so let’s look at a number of ways to reclaim the costs of using your home without getting into trouble.
Standard HMRC allowance for all employees.
Below is a flat rate deduction you can claim without the need for any back up or convoluted calculations.
- £10 a month for 25 hours to 50 hours working from home
- £18 a month for over 50 to 100 hours
- £26 a month for over 100 hours
None of the above really amount to very much and are hardly likely to compensate you if you regularly work from home but there are other options, they just require more work.
Use of home formula.
As in our original example let's say we’ve calculated the total annual costs for our electricity, gas, council tax and either rent or mortgage interest (capital repayment element can’t be included) and the total cost is £16,800.
Our annual costs are £16,800 and monthly £1400 for our entire home.
Now we need the space allocation and for this I will use an assumption that the spare room is 1/7th of our total living space.
Our costs for the area in use as a home office are £2,400 annually (£16,800 / 7) or £200 monthly.
But we have one more calculation to do if we want to avoid the capital gains trap we highlighted earlier.
Finally, we need to declare the amount of time the area is in use for “business”.
To avoid the CGT trap we need to ensure we don’t claim 100% time allocation. By declaring that there is an element of private use Private Residence Relief will still apply should you sell.
Let’s say 90% of the time the spare room is used for business purposes.
Cost of space used £2,400 annually – used 90% for business = £2,160 charge to your business. Not a huge amount but better than any of the flat rate deductions and it will not land you in bother for Income Tax or Capital Gains Tax.
Note: it’s important to document the calculation you use to back up your claim and it will help you to refresh your costs and increase the claim as they rise. (Be consistent)
You may also be thinking about converting your garage or building a shed to store company goods. My advice is straight forward, pay for all conversion costs personally and rent back the garage/shed to your business using the formula above. Just ensure you don’t charge for a 100% time allocation, make sure there is an element of personal use.