Overview
If you are self-employed and work from home at least some of the time then you may be able to include an expense deduction in your accounts in respect of the costs of running your home office.
We would recommend the flat rate method below for most of our clients, but if you believe you are incurring significant expenses as a result of working from home then the proportional costs might be more suitable.
If you are a director of a Ltd company then please see our other article for using your home as an office here.
Eligibility
In order to claim for expenses in respect of your home office the space used in your home must be used “wholly and exclusively” for the business, at the time you are working in it.
Wholly and exclusively means that when part of the home is being used for the business purposes then that is the sole use of that part of the home, at that time. Therefore, if the part of the home used for business purposes is also, at the same time, used for some other non-business purpose (i.e. family members using the room to watch television, run their own business, play, cook dinner) , no expense claim is due.
If part of your home is set aside solely for business use for a period during each week, you can claim as a deduction in your accounts the costs you have incurred on that part of the home during the period it was used for business purposes.
There are two ways the expense can be claimed.
Method 1 – Flat rate
Under the simplified expenses rules a flat rate can be charged based on the number of hours you work from home a month. The bands are as follows:
So the maximum you could claim in a year under this method is £312. Slightly lower amounts applied previously and we will need to apportion accordingly if your end is not conterminous with HMRC.
Please see the following link to HMRC guidance for the simplified expenses calculation method.
Method 2 – Proportional basis
This method is a bit more complex and involves calculating the household bills in a year and then using some reasonable basis to apportion them. One way is by dividing them by the number of rooms (exclude bathrooms) and then multiplying the number used for business.
For example, if you work in your living room for 10 hours per week, you may be able to claim a deduction in your accounts for the cost of heat, light, council tax, insurance and possibly mortgage interest.
This would be calculated using a proportion of all of these costs, based on the size of the property, hours used for the business and the usage for the rest of the time. HMRC require this to be on a “fair and reasonable basis”.
However if, for example, you use your living room to work and your family are also sharing that space at the time you are working, the room is not being used wholly and exclusively for business purposes and no expense deduction is then available.
Therefore, if you do work from home and space allows, it would be more tax efficient to have a room specifically for you to work in, during working hours. This room does not have to be used 100% for business purposes (ie it can be a guest bedroom, living room or study during the periods you are not working), but when you are working in it, that must be its only use.
For example, your house has 6 rooms. One room is used as your office from Monday to Wednesday, 9am to 5pm, and is used as a guest bedroom and family study for the remainder of the time.
As long as no other family members use the room Monday to Wednesday, 9am to 5pm, you would be able to calculate an expense deduction for the 24 hours of business use per week.
Avoid using a room as 100% business
A note of caution using the proportion of costs method regarding the business use of your home. If the room is used 100% of the time for business then HMRC could argue that the same business % applied to the expenses should also apply as a chargeable amount to capital gains tax on any future gain on sale of the property. Normally your home of main residence is exempt from capital gains tax on sale due to a relief called Principal Private Residence (PPR), however business property does not enjoy this relief. Providing you do not claim the room is used 100% of the time for business purposes this pitfall should be avoided.
Calculating an appropriate proportion of costs
When calculating a use of home deduction, it is usual to consider the size of the property, the space used for business purposes and the time spent using the space for business purposes. This proportion would then be applied to the relevant costs and a view taken to ensure that the claim is proportionate and an accurate representation of the actual usage of the property for business purposes.
This will be a different calculation for all sole traders, depending on their business and their property. We will be able to advise on an appropriate claim as part of preparing your sole trade accounts and will usually require details of the size of your property, the space used for business purposes and the time spent in that space for business purposes.
Assuming that your workspace is used wholly and exclusively for business purposes, while you are working, you may make a claim for the following expenses:
Insurance - If the business use is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed. Otherwise, an appropriate part of the premium can be allowed.
Council Tax - The council tax is a tax on property. If business use is established the appropriate proportion of the tax may be allowed. However, depending on how much of your property is used for business purposes, business rates may be relevant rather than domestic council tax.
Mortgage interest - If part of the home is used solely for business then an appropriate part of the mortgage interest is an allowable deduction. Repayments of capital are not allowable.
Rent - Part of the rent is an allowable expense when the home is rented and part of the property is used solely for business purposes.
A sole trader cannot charge a separate rent to his or her own business. This is because individuals cannot rent property to themselves. The allowable deduction will be the proportion of the rent paid to the landlord that is attributable to the part of the home being used solely for business purposes.
Heat, light and power - A proportion of the heating and lighting costs of a room, used at times solely for business purposes, is allowable. The deduction should reflect the facts of usage.
Telephone - The cost of business calls is allowable. It is possible to also claim for a proportion of the line rental (based on the ratio of business use to total use). The proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure of business usage.
Broadband - A deduction in respect of expenditure on an internet connection (including broadband and wireless broadband) is allowable to the extent that the connection is used for business purposes. Where there is 'mixed' (business/non-business) use, the costs should be apportioned in line with the telephone usage.
Property repairs - A deduction could also be made for repairs and maintenance to the house overall such as a roof repair, but not to rooms not used for business such as repainting your bedroom (assuming that isn’t your office). Repainting the spare room used as the office however could be claimed in full subject to the relevant business % rate calculated above.
Records
We would also recommend that you keep copies of all utility bills, telephone bills, council tax statements and your mortgage statements for each tax year, along with a record of usage of your property (this can be based on a normal working week, rather than keeping a detailed diary for the entire year) for HMRC. We can then also use these details to calculate an appropriate deduction to be included in your accounts in respect of the use of your home.
Further information
For more information please see here.