Top Tax Tip 2 for Sole Traders

Continuing in my series of top tax tips for Sole Traders comes clarification on an old chestnut: claiming use of home as office.

The idea here is that as a sole trader you don't rent an office but you use a part of your home. Therefore you put through a proportion of your household as as a business expense.

Many myths and counter myths surround this proposition. What is allowable, what is not, what proportion you can claim and whether it lays you open to capital gains tax if you sell your home.

Firstly let us be clear that this is an allowable expense if you actually use part of your home as an office (or for some other business purpose Eg storage). Let us also clear up the idea that it will attract Capital Gains Tax if you sell your property. In 2008 HMRC clarified that this is not the case as long as you do not claim the repayment element of your mortgage (in other words only claim the interest element).

That being so, the next question is 'what proportion can I claim?'. The principle that HMRC are looking for is a 'reasonable claim' in proportion to use.

First calculate the total number of rooms in the house that are available for business use excluding bathroom, hall, kitchen, toilets.

Then calculate the number that are actually used. Then estimate how much of each room is used. In other words if the spare bedroom has a desk where you do your office work and a bed where guests can stay, estimate how much of the room gets used as an office - say 50% for arguments sake.

Then calculate how much of the time it gets used exclusively for business and how much is is used for other purposes. For example, if you use the room one evening a week and the rest of the time the children play in the room, only claim for in proportion to one evening a week. On the other hand if you have a dedicated room for your office and while you don't use it every day, it is full of business admin filing and never used for anything else, claim that room as being used 100% for business.

Generally it works to apply that total to the entirety of your household bills (mortgage interest / rent, insurance, gas, electricity, council tax, water rates etc) but sometimes you might find that does not produce a 'reasonable' result. For example you might have  a business that requires a lot of electricity. In which case split out that cost and apply a different proportion.

By now you may find yourself thinking 'life is too short to really be bothered with this!'. I sympathise. In which case there are a couple of ways out. HMRC has a no questions asked allowable claim of £3/week. Alternatively send me an email and I have an easy-to-use Use of Home calculator that I can share with you.

NB: Company directors and employees beware - the advice above is specific to sole traders and different rules apply to directors and employees.