Working from Home (home office) – what can you reclaim?

man using macbook

Many people have been and are now working from home and want to reclaim expenses. Due to its popularity its not surprising that HMRC have been looking closely at claims.

The rules are different for employees and the self employed.

Companies, Directors and Employees

Let’s start with employees.

The first critical point is that employees can only claim expenses if they have to work from home, if they voluntarily choose to work from home they can’t claim.

Then there are basically 3 options for employees and directors:

  1. Claim £6 per week – You’ll get tax relief based on the rate at which you pay tax. For example, if you pay the 20% basic rate of tax and claim tax relief on £6 a week you would get £1.20 per week in tax relief (20% of £6).
  2. Claim a % of actual expenses – HMRC suggest –

You may be able to claim tax relief for:

  • gas and electricity
  • metered water
  • business phone calls, including dial-up internet access

You cannot claim for the whole bill, just the part that relates to your work.

In addition if you have costs such business insurance, repairs of business equipment, cost of cleaning materials to clean your business work area (COVID being a key reason) these would be allowable.

Claims should be submitted on expense claim forms with supporting calculations.

Capital Allowances are available on business equipment.

Mortgage Interest, Rent, Rates are not allowable as HMRC say that costs must be ‘wholly and exclusively for business’ and HMRC are unconvinced that employees/directors meet this criteria.

3. Rent part of your home to your company – To do this you need to create a licence agreement (we have template if you need one) with your company in order to allow it to occupy part of your property. It then pays you rent and service charges and you then claim all your expenses under Self Assessment.

This means you will need to complete the property section of the Self Assessment return as you are effectively becoming a commercial landlord but it means you can recover all relevant overheads and variable costs, mortgage interest would subject to section 24 (so excluded and then used in obtaining the Finance Cost Allowance), you can also include a proportion of rent and rates.

Whilst you home is usually exempt for Capital Gains Tax (PRR) your home office once rented out will not be.

Self Employed including Landlords

The Self Employed are generally treated more favourably than employees when it comes to working from home.

There are basically 2 options

Simplified Expenses

You can only use simplified expenses if you work for 25 hours or more a month from home.

Hours of business use per monthFlat rate per month
25 to 50£10
51 to 100£18
101 and more£26

% of Actual Costs

You can claim a proportion of your costs for things like:

  • heating
  • electricity
  • Council Tax
  • mortgage interest or rent
  • internet and telephone use

You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.

Example

You have 4 rooms in your home, one of which you use only as an office.

Your electricity bill for the year is £400. Assuming all the rooms in your home use equal amounts of electricity, you can claim £100 as allowable expenses (£400 divided by 4).

If you worked only one day a week from home, you could claim £14.29 as allowable expenses (£100 divided by 7).

steve@bicknells.net

Working at Home – How can claim tax relief?

Working from Home Tax Relief

Tax Savings for Employees and business covering VAT, Home Costs and Equipment

Further information on the items discussed in the video

VAT Notice 700 – 32. Apportionment of tax between business and non-business activities

This section explains how to treat tax incurred on goods or services that are used only partly for business purposes

https://www.gov.uk/guidance/vat-guide-notice-700#apportionment-of-tax-between-business-and-non-business-activities

 

Claim tax relief for your job expenses

From 6 April 2020 your employer can pay you up to £6 a week (£26 a month) to cover your additional costs if you have to work from home. For previous tax years the rate is £4 a week (£18 a month).

You will not need to keep any records.

If you work at home voluntarily

If you’ve agreed with your employer to work at home voluntarily, or you choose to work at home, you cannot claim tax relief on the bills you have to pay.

 

https://www.gov.uk/tax-relief-for-employees/working-at-home

 

Simplified expenses if you’re self-employed

 

You can only use simplified expenses if you work for 25 hours or more a month from home.

Hours of business use per month Flat rate per month
25 to 50 £10
51 to 100 £18
101 and more £26

Example

You worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:

10 months x £10 = £100
2 months x £18 = £36

Total you can claim = £136

https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home

Specific deductions: use of home: apportioning the expenditure

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 trade 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 trade purposes, as compared to any other use?

The method of apportioning an expense depends on the relative importance of each of these factors. There are examples at BIM47825.

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim47815

 

Claim capital allowances

 

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

  • equipment
  • machinery

https://www.gov.uk/capital-allowances

Other Points to Consider

  • Capital Gains Tax
  • Planning Consent
  • Insurance
  • Business Rates
  • Benefit in Kind

 

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Simplified Expenses – Working From Home

Beautiful young woman with coffee using laptop in the kitchen

Most people working from home were claiming the £4 per week allowance based on HMRC guidance, but this has now been updated for the self employed.

You can now calculate your allowable expenses using a flat rate based on the hours you work from home each month.

This means you don’t have to work out the proportion of personal and business use for your home, eg how much of your utility bills are for business.

The flat rate doesn’t include telephone or internet expenses. You can claim the business proportion of these bills by working out the actual costs.

You can only use simplified expenses if you work for 25 hours or more a month from home.

Hours of business use per month Flat rate per month
25 to 50 £10
51 to 100 £18
101 and more £26

Example

You worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:

10 months x £10 = £100
2 months x £18 = £36

Total you can claim = £136

Use the simplified expenses checker to compare what you can claim using simplified expenses with what you can claim by working out the actual costs.

https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home

Alternatively you could claim you can claim a proportion (based on the number of rooms and hours of business use) of your household expenses

  • Mortgage interest or rent
  • Council tax
  • Water rates
  • Repairs and maintenance
  • Building and contents insurance
  • Electricity
  • Gas, oil or other heating costs
  • Cleaning
  • Telephone (based on usage)
  • Broadband

You can draw up a home rental agreement to reclaim these costs.

The Rental Agreement can be very basic, it just needs to show:

  • The Parties – Employee, Company, Home Office Address
  • The agreement is for use of the accommodation, furniture etc (‘the Home Office’)
  • The hours it will be used
  • The rental charge

or your could use an agreement like this one

https://www.rocketlawyer.co.uk/documents-and-forms/home-office-space-agreement.rl#

If the rental is only to cover costs (and not to make a profit) then it should not create any tax liability.

Some experts say that claiming Mortgage Interest and Council Tax can be queried but that would depend on circumstances.

There are also other isuues to consider such as VAT and Capital Gains and these are covered in the blog below.

http://stevejbicknell.com/2013/01/06/what-are-the-tax-issues-and-advantages-of-a-home-office/

steve@bicknells.net

If you work from home and claim mileage, you could be in for a shock

Highway Robbery

Its probably fair to say that most contractors who have an office at their home claim business mileage when they visit clients, but things could be about to change for the worse….

In what could become a landmark decision in the interpretation of “wholly and exclusively” allowable expenditure, a doctor has lost a protracted battle with HMRC over his business mileage claims.

After an enquiry lasting more than seven years and three tribunal hearings, the First-tier Tribunal led by Judge Kevin Poole acknowledged Dr Samad Samadian had a dedicated office in his home which was necessary for his professional activity.

However, the panel did not accept that the home office could be treated as the starting point for calculating private practice business mileage involving habitual journeys.

Potentially, the decision has wide implications for all professional self-employed activity, where the business owner undertakes substantive work at home, but also has another business base at which they deliver their expertise regularly.

http://www.taxation.co.uk/taxation/Articles/2013/02/13/53821/way-go-home

It is understood that Dr Samadian will be appealing.

But this could lead to Consultants paying back thousands of pounds in tax.

Phil Stunell spotted this article with the full details http://www.independent-practitioner-today.co.uk/news_story.php?r=1605&a=public

steve@bicknells.net

What are the tax issues and advantages of a Home Office?

Home Office

Working from home is a popular option for business owners and employees. Assuming you need to create office space you could either convert an existing room, loft, or garage or build a new structure in the garden.

VAT

  1. Estimate the amount of Business & Personal Use – you can only reclaim VAT on the Business Use proportion – you might have 100% business use if you were building an office in the garden. HMRC’s published and internal guidance states,
    “Where a domestic room or rooms is put to business use, you may agree to an apportionment using an objective test to the extent to which the room is put to business use” (HMRC Manual V1-13, Section 14, para 14.7, and VAT Notice 700, Section 33,)
  2. The invoice should be in Business Name
  3. You can reclaim 100% VAT on Office Equipment used entirely for business purposes (if you reclaim VAT you need to charge VAT if you sell the equipment)
  4. If you then sell your home to a buyer who wants to use the premises as part of their dwelling you don’t charge any VAT as it will be exempt

Capital Allowances

Capital Allowances are not given on land and building but you could claim for integral features, assets and equipment. Sole Traders and Partners can exclude a proportion for private use.

Benefit In Kind

Directors and Employees who have personal use of the assets will incur tax as it will be a benefit in kind. So it might be better to keep business assets for business use only to avoid this tax. Here is my blog comparing Directors Loans to Use of Assets http://stevejbicknell.com/2012/04/14/directors-loan-vs-private-use-of-company-assets/

Expenses

You can claim a proportion (based on the number of rooms and hours of business use) of your household expenses

  • Mortgage interest or rent
  • Council tax
  • Water rates
  • Repairs and maintenance
  • Building and contents insurance
  • Electricity
  • Gas, oil or other heating costs
  • Cleaning
  • Telephone (based on usage)
  • Broadband

You can draw up a home rental agreement to reclaim these costs, or claim expenses, or if the use is minimal you might find it easier to claim £4 per week as suggested by HMRC.

Here are some examples http://www.hmrc.gov.uk/manuals/bimmanual/bim47825.htm

Capital Gains Tax

Your principle private residence is exempt from capital gains but your home office won’t be if its exclusively used for business, but it will only be a small proportion of the property value and as such any gain will probably be covered by your annual allowance £11,100 (2016/17) if you are a sole trader or partner, if not your company could have a small amount of capital gains tax to pay if a gain is made.

If you are a sole trader or partner and there is a private use element to your home office then the office will be exempt.

Other Issues to consider

Planning Use -You might wish to apply for a Certificate of Lawfulness (Proposed)

for a change of use, for example if you wanted to use a single room in a dwelling house as an office. https://www.planningportal.co.uk/info/200130/common_projects/120/what_to_do_next/3 

Insurance – you will need to inform your home insurance company that you now have a home office

Business Rateshttp://www.businesslink.gov.uk/bdotg/action/detail?itemId=1086066821&r.l1=1073858808&r.l2=1073859221&r.l3=1086066759&r.s=sc&type=RESOURCES

steve@bicknells.net