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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Why do your workers need to be in an office?

Home Worker

 

More and more office based workers are now working from home and the employers are focusing on Output rather than hours. For generations work has meant 8 hours per day at your desk but that’s changing.

Switching from office based to home based is best done in stages, starting with a couple of days home based and building up.

Increasing the numbers of UK employees working from home can cut costs by £3 billion a year for UK employers and employees and save over 3 million tonnes of carbon a year, according to a report released in May 2014 by the Carbon Trust.

Advances in technologies such as broadband internet, smart phones and cloud computing mean that many jobs can now be done effectively outside of traditional workplaces.  This has resulted in a significant increase in the number of UK employees who work from home, with the total now standing at over 4 million out of a workforce of 30 million.

Investigating the potential environmental benefits of a further shift to homeworking, the new research concluded that, if adopted and encouraged by employers across the country, homeworking could result in annual savings of over 3 million tonnes of carbon and cut costs by £3 billion.

Over 40 per cent of UK jobs are compatible with working from home, but recent research by the Carbon Trust has found that only 35 per cent of companies have a policy allowing their employees to work from home. And where homeworking is offered by companies, between one-third and one-half choose not to accept it.

Homeworking reduces employee commuting, resulting in carbon, money and time savings. If office space is properly rationalised to reflect this, homeworking can also significantly reduce office energy consumption and rental costs.

It is estimated that UK employees save an average of £450 per year if they work from home for 2 days a week.

A UK employer could save around £280 per homeworker per year (according to Indicator).

Ian Foddering, Chief Technology Officer & Technical Director at Cisco UK & Ireland, said:

“By 2018, there will be over 10 billion mobile-connected devices globally, as such, telecommuting will not only become commonplace but is already in the progress of fast becoming the most natural way for people to work and collaborate globally. Cisco has aggressive targets to reduce greenhouse gas emissions from our operations and suppliers worldwide, and telecommuting is helping us to achieve these goals.

“The average Cisco employee telecommutes 2 days a week, and those using our Cisco Virtual Office technology typically work from home 3 days each week. In total, this amounts to avoiding 35 million miles of commuting per year. Not only is this great for the environment, reducing Cisco’s CO2 emissions by 17,000 tonnes annually, but it’s also great for business, with an estimated $333 million per year made in productivity savings.

“Although some organisations may experience cultural barriers in adopting telecommuting, we believe our experience at Cisco demonstrates the real benefits to the environment, the business and the individual employee.”

Employers are also saving £6k by opting for Freelancers…

A survey by PeoplePerHour has shown that the self-employed segment of the labour market in both the UK and USA is growing at a rate of 3.5% per year – faster than any other sector. Should this growth continue for the next five years, researchers predict that half of the working population could be self-employed freelancers by 2020.

The survey also suggests that small businesses that hire freelancers instead of full-time employees could save £6,297.17 per annum. The survey shows that the average waste or spare capacity for each employee in a SMEs is 1.9 hours per day.

The research identifies a number of key drivers behind the shift from employment to self-employment, including “the availability of ubiquitous and inexpensive computing power, sophisticated applications and cloud-based services“. [Lawdonut]

 

 

steve@bicknells.net

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

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