For owners of small businesses and independent professionals there are huge benefits to working from a home office, and for many a start-up it is an absolute necessity. With the right setup at home, you can achieve a high level of productivity and flexibility and enjoy lower running costs than a formal office setting.
But if you are working from home, should you be including the cost of your home office as an expense on your self-assessment tax return?
The answer to this question is quite different depending on whether you are working as a sole trader or as a director of a limited company.
Read on to find out whether you should be including home office expenses in your self-assessment tax return.
As a self-employed sole trader, using your home as your place of business, you are able to claim a proportion of your costs for things like:
- Council Tax
- mortgage interest
- internet and telephone use.
You’ll need to find a reasonable method of dividing your costs, by the number of rooms you use for business or the amount of time you spend working from home, for example.
In arriving at the proportion of allowable expenses, you need to establish the underlying facts.
The factors to be taken into account when apportioning an expense include:
- Area: what proportion in terms of area of the home is used for business purposes?
- Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
- Time: how long is it used for business purposes, as compared to any other use?
The method of apportioning an expense depends on the relative importance of each of these factors.
Allowable Expenses broadly fall into two categories, fixed costs and running costs.
Some costs relate to the whole house and have to be paid even if there is no trade use. These include costs such as Council Tax, mortgage interest, insurance, water rates, general repairs and rent.
If part of the home is set aside solely for business use for a specific period then a part of these costs is allowable. It will normally be appropriate to apportion these expenses by area and time.
There are some expenses where the total bill may vary with the amount of business use. They include cleaning, heat and light and metered water.
If the claim is small and there is only minor business use of the home, for example you write up your business records at home, a claim based on any reasonable basis is acceptable.
Where there is significant business use it is appropriate to apportion such expenses by reference to the facts of that usage.
Detailed guidance on these expenses can be found on the HMRC website.
The HMRC guidance also provides this useful example:
Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours.
The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.
After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480).
The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.
If you are operating your business as a director of a limited company, and you’re working from home, you’ll be incurring extra costs, such as electricity, gas and water during the working day.
But your home doesn't belong to the company - it’s yours (or your landlord’s, if it’s a rented property). So can you claim relief on these costs like a sole trader can?
How much can you claim?
Additional household expenses reimbursed to you by your company are exempt from income tax up to an amount of £18 per month.
In order to claim anything over £18 per month for a home-as-office you must have a need to carry out a substantive percentage of your employment duties from your home-office and should not be able to carry out the same duties at your client’s site.
If you could work at the client’s site but choose to work from home instead this will not count in your favour. However, if your home office is your main place of work then you are allowed to claim additional household expenses calculated in the same way as for a sole trader (see above).
Another way to deal with this is to work out how much relief you could claim if you were a sole trader - then charge your company rent for that equivalent amount.
The company can claim corporation tax relief on the rental costs.
The rental you receive counts as income from property, so you’ll need to include this on your personal tax return.
You can then set off the costs of running that part of the property against the rental income, so there’s no additional cost to you.
If you choose to do this, have a proper legal rent agreement in place between you and your company, and make sure your mortgage, or tenancy agreement, allows you to effectively sub-let part of your home in this way.
This article is intended as general guidance only and is not a substitute for specific advice about your own business situation. If you are unclear as to where you stand on this issue you should seek professional advice from a qualified accountant.