The number of self-employed individuals and small businesses in the UK is set to increasingly annually and by 2030, 50% of the workforce will be self-employed. If you’re one of the many self-employed and small business owners who spend some time working from home, are you claiming tax relief on your household expenses? If not, here’s how to work out how much you can claim.
Calculating business use of your home
There are two methods of calculating business use of your home.
If you are sole trader or a partner in a partnership, you are eligible to use the simplified accounting method to calculate business use of your home. Using this method means that you can claim a flat rate of expenses per year without having to provide evidence to HMRC.
The amount you receive depends on how many hours you work from home. To calculate the flat rate accounting method, you should calculate the number of hours a month you spend at home working on your business.
The amount you can claim, based on average hours a month worked from home, is summarised below:
- If you work up to 50 hours a month, you can claim £10 per month
- If you work from 51 to 100 hours per month, you can claim £18 per month
- If yo work 101 hours or more a month from home, you can claim for £26 per month
The main advantages of adopting the flat rate simplified accounting method is a quicker and easier method of claiming tax relief, but as you can see, the amounts you can claim do not represent the reality of costs associated with working from home. You could in fact end up paying more in tax in the long run.
The flat rate accounting method only considers costs associated with heat, light and power you use in your home but as you can see in the next section, you also have the option to claim for other home expenses, such as rent or mortgage interest, council tax, telephone and broadband. This method of claiming expenses if you work from home is known as the analysing the costs method.
Analysing the costs method
If you want to claim part of the actual running costs of your home in your business accounts then how much you can claim depends on the type of business you have and what work you actually do at home and you can do this via the analysing the costs method.
For example, if you are a freelance photographer, you might spend a good chunk of your time at home reviewing and enhancing photos ready for client review but spend the rest of your working life on shoot on location taking the photos. Or perhaps you spend the majority of your working life at home if you are a web designer or digital marketer. In both instances, HMRC will let you apportion your home expenses between private and work hours you spend at home, on a ‘fair and reasonable’ basis.
How do we do calculate this?
One way to calculate the percentage of your home expenses you can claim is to firstly calculate the number of rooms you use for business and how much time you spend using these rooms for business. We recommend, therefore, that you do not use any part of your home solely for business, and never use for personal activities, as you would need to pay capital gains tax if and when you sold your home.
Instead, you could use a spare room as a study for business activities, but also use the room for other personal activities, so the study is used for ‘dual’ purposes. So you could use the study as a music room, or a play room for your children.
Using one or more rooms for dual purposes is a good starting point to calculate the percentage of home expenses you can claim tax relief on. If for example there are a total of 10 rooms in your home and you use only 1 room for business 90% of the time, you can add up all the overall costs from your home, multiply by 1/10 and then by 90% to get to the percentage figure you can use to business use of your home.
Southside Accounting work closely with self employed individuals and small businesses and can help you determine the best accounting method to claim tax relief on your home expenses if you work some or all of your time from home. Contact us to see how we can help.
What home expenses can I claim?
Some of the costs that you can include in your calculations for working from home expenses include the following:
You will not be able to claim the full mortgage payments you make on your property each month if you are self employed, but you can claim the interest on any mortgage payments you make.
If you rent property, you can use the accounting costs method figure to claim a proportion of you rental payments you make each month.
It is also possible to claim a proportion of your council tax payments monthly. However, we suggest you seek professional advice, such as from an accountant like Southside Accounting, to make sure you do not have to pay business rates rather than council tax, which could happen if you spend a large majority of your time working from home.
Light and heat
You can claim for gas and electricity costs for lighting and heating in the room(s) you use for business purposes in your home.
Telephone and broadband
It is possible to claim a proportion of your telephone and broadband usage at home, and the calculation will be based on the amount of business versus personal use, and not on the number of rooms in your home.
If you have a dedicated business line, you can claim the full amount.
If you need to undertake any repairs on your property and in particular the repair relates solely to the part of the property used for business, you can claim the full amount for tax relief.
If the repair is to the whole house, for example a repairing the roof, you can use the same method as above for rent or council tax.
If the repair is just for a part of the house that’s not used for business, for example some work in your kitchen, then you are unable to claim for this.
You may run a business from home that uses a lot of water, such as a car valeting business, then you will need to contact the water board to be charged business versus personal rates, and you could claim the full cost.
However, if you do not use a proportionally large amount of water when working from home, you cannot claim for tax relief.
Working from home:get a tax rebate from your tax return
As you can see, claiming costs when working from home could potentially be a very beneficial tax relief to the running costs of your home.
Southside Accounting can help you calculate your working from home costs to help you make the most of the tax reliefs available to the self-employed, and help you save on tax when completing your tax return.
Southside Accounting are Self Assessment Tax Return Accountants
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Written by Shaima Todd.