If you are self-employed and work from home there are expenses that you can claim for, although the rules set out by HMRC are complex and detailed and therefore each claim should be given due consideration being careful to keep within HMRC rules.
In this blog, we look at the key expenses where it is possible to claim as an allowable expense whilst working from home. As this is a complex subject, we do suggest calling us for information to receive tailored advice on your own personal circumstances.
Passing the first hurdle
There are certain expenses that you may be able to claim if you work from home. HMRC, however, will first need to be convinced that a large majority of your working week pattern involves working regularly and consistently from home versus, for example, having a workspace at home where you work for an hour or two in the evening to complete administration and are otherwise offsite at client meetings during the day.
What expenses can I claim?
If HMRC is happy with your work set-up at home, there are certain tax reliefs available to you including the important task of purchasing of equipment to carry out work competently. The good news is that this does include everything from furniture, including your office desk and chair, to computer equipment.
Sole trader or Limited Company?
As a sole trader, the rules are somewhat simpler compared to a limited company and there are two options available to you.
The first option allows you to claim a flat rate which covers all of your allowable expenses based on the number of hours you work per month, with a minimum of 25 hours per month required to make a claim. There is a sliding scale of how much you can claim, with 25 hours -50 hours per month worked giving you a £10 flat rate per month, 51-100 hours worked allowing £18 flat rate per month, and 101 hours or more working hours allowing for £26 flat rate per month.
The second option available to sole traders is to review your actual business expenses in full per month, being careful to differentiate between business and personal expenses, including utility bills which could prove difficult to split, albeit guidance is provided by HMRC.
HMRC offer a Simplified Expenses Checker to help you decide which of the two options available is best for you, which can be found here.
As a limited company, there are also two options available to you for claiming allowable expenses.
The first option available is similar to a sole trader where you can claim a flat rate amount for allowable expenses whilst working from home. For limited companies, however, this is not based on the number of hours worked from home, rather a flat rate amount is given of £4 per week, totalling £208 per year. The good news here is that this flat rate amount can be claimed alongside any other allowable expenses that occur. It is worth noting that this flat rate payment paid to limited companies does not need to declare on a director’s self-assessment tax return.
The second option available to limited companies is to allow a director to rent the home office workspace from the limited company, and so creating a formal rental agreement between them, and affording the limited company additional tax reliefs as a result being able to claim the rent as an expense. For this to happen, it is imperative that a rental agreement is created between the director and the limited company so it is absolutely clear to HMRC that the rental income for the home office workspace relates solely for work for the limited company. HMRC may otherwise view the payment between the director and the limited company as an additional salary which would be subject to income tax and national insurance. Another great perk of this second option available to limited companies is the opportunity for the limited company to deduct the rental payments from the company’s pre-tax profit, and therefore is not subject to corporation tax and therefore a reduction in your overall tax bill.
Rental agreements tend to follow a standard format, but it goes without saying that the rental amount should be realistic and considered fair, what HMRC call at an ‘arm’s length’ basis, to all parties involved. It also goes without saying that with a formal rental agreement in place, there has to be a dedicated workspace or room to rent to conduct business.
When considering renting, there is also the consideration of additional expenses relating to working from home, including council tax and utilities and also perhaps mortgage payments, of which a proportion can be considered as an allowable expense for business purposes. You can also claim for any repairs you undertake to the office workspace, repairs that relate directly to the running of the business from home.
Things get complicated if you decide to sell your home whilst a rental agreement is in place and therefore there is an official workspace within your home. There is a good chance that you will need to declare capital gains tax on your self-assessment tax if there is a perceived increase in the value of the property as a result of having the office workspace in the home. The actual calculation is lead by HMRC and is fairly complex, for example, there could be an opportunity to reduce the capital gains tax if the office workspace is also used privately or ‘out of hours’. Specialised advise in this regard is essential.
Other expenses you can claim from working from home
There are various other expenses which you could consider claiming if set-up in accordance with HMRC rules, including the use of the internet in your home. The cost of broadband can be readily claimed by a limited company with a rental agreement in place, otherwise, internet usage is considered a personal expense. Of course, whether a sole trader or limited company, if you set up set a separate dedicated broadband line purely used for business in the home office workspace, you can claim this as an allowable expense.
Along with broadband, business telephone calls are another allowable expense which you can take advantage of as a sole trader or a limited company. To gain full tax relief as a limited company, make sure the phone contract is set-up under the limited company name, and this way, any personal calls made using the business line will also qualify for full tax relief. HMRC provide the tax relief by reducing pre-tax profits, and therefore your taxable income is reduced. Business phone lines do tend to be more expensive than personal phone lines so it is worth shopping around for a good deal, and an increase in cost will hopefully be covered by the tax savings you make. We do not suggest you make business calls on a personal landline as you will not be able to claim for full tax relief. This is because HMRC recognises that personal phone contracts have free calls included in the contract so no extra cost or expense is perceived to be incurred.
For a sole trader, you can claim full tax relief on business calls only, and in a similar fashion, HMRC will deduct the expense from pre-tax profits and so reduce your taxable income and your tax bill.
Written by Shaima Todd