Working from home

Most business owners work from home to some degree and increasingly employees are as well. In this blog we look at the various tax deductions available for working from home.

Since HMRC’s starting position is that business expenses should be ‘wholly and exclusively’ for the business, this will always be an area where special care and attention is needed. That said there are tried and tested ways for these expenses to be introduced to tax returns.

One important first thing to understand about tax and working from home is that the rules differ depending on whether you are working from home as:

• A Sole Trader or Partner (in a Partners,hip)

• A Director / Employee of a company

Sole traders and partners

Simplified Deductions

The simplest and least contentious way for sole traders and partners to introduce working from home expenditure is through a flat rate deduction that HMRC gives us.

This deduction dependent on the number of hours per month worked at home:

• 25 to 50 hrs - £10/month

• 51 to 100 hrs - £18/month

• 101 and over - £26/month

These deductions are considered to cover the cost of using the space and also services such as telephone and broadband. Whilst they are easy to calculate and use they are obviously not very generous which is why many business owners consider the alternative which is an apportionment of actual cost.

Apportionment

In this scenario the HMRC expects us to total all household expenditure and apportion this expenditure as a % according to the amount of space being used and the amount of time being used.

The potential tax saving is much greater but the record keeping is more arduous as we may have to back up our calculations with proof of spend and the basis of our apportionment %.

Expenditure that that qualifies in the calculation of household expenditure includes:

• Mortgage interest (but not mortgage repayments)

• Rent (as an alternative to mortgage interest)

• Council Tax

• Insurance

• Water Rates

• Heat, Light and Power

• Repairs and cleaning

It does not however include telephone or broadband.

In terms of apportionment, HMRC expects a reasonable calculation based on % of space used and % of time used. For example if a sole trader is using 20% of their home for business for half the week, HMRC would expect them to apportion the household expenses as 10% for business (20% x 50%).

Business owners are not expected to keep a time log. A reasonable estimate is all that is required. For clients of Co-, a spreadsheet is available to facilitate this apportionment % calculation.

Directors and employees

Company Directors are often treated as Employees for tax purposes and this will be the default position unless an alternative is formalised (see below).

Homeworking Allowance

Similar to Self Employed Simplified Deductions, HMRC has agreed that up to £6/week can be paid to employees as an allowance for homeworking expenses.

Payments in excess of £6/week will be considered a benefit of employment and taxed under P11d.

Apportionment

It is also possible for employees to be paid for actual costs that result from their homeworking. The problem is to prove that it is a cost of employment and HMRC sets a high bar for these claims. Rates payments for example are never allowed, the apportionment of power, heat and light is much more likely to be challenged.

Since Directors who are the most likely category of employee to see benefit in this method have an alternative and more attractive option available it is in practice rarely used.

Rent Under Licence Agreement

If the Director licences use of their home to the company, payments are not deemed employment expenses but rather rental income.

A licence agreement is needed between the owners or tenants of the property and the company to formalise the arrangement otherwise HMRC may deem these payments as untaxed salary.

Once the agreement is in place the Director can charge the company rent. The rent charged is left up to the Director (but should not exceed a reasonable market rent), however Directors should bear in mind that this rent charge now needs to be declared as property income on their Self Assessment.

If the rent they charge the company exceeds the cost to them of providing the space they will have a taxable income. For this reason it is in most Directors interests to limit the charge to the actual cost of providing the space. The result is that the charge to the company matches the cost of providing the space and no taxable income arises.

Again an apportionment of the actual costs of running the house is needed (see Sole Traders apportionment above). For clients of Co- both rental agreements and a spreadsheet to facilitate the calculation of apportionment are available.

There are some other points that are worth noting in this arrangement:

• Rents are commercial and therefore Rent-a-Room relief is not claimable

• Arrangements made with joint owners or joint tenants will usually result in both owners or tenants needing to declare property income via Self Assessment

• Care needs to be taken that any rent agreements to do not endanger Private Residents Relief and incur Capital Gains Tax if the property is sold

• Care is also needed that arrangements do not cause the property to be liable for Business Rates