The home has a dual role for many self-employed people. It is where they live and also where they carry on some or all of their business. Even if they carry on most of their business elsewhere they are still entitled to a deduction for the part of the household expenses provided that there are times when part of their home is used solely for business purposes.
Many of the bills for household expenses cover both business and private use (e.g. electricity). A single bill does not mean that the whole of the expenditure is disallowable. The part of the cost attributable to business use is allowable.
What is allowable depends on the particular facts, including the extent and nature of the business activities undertaken in the home.
If there is only minor use, for example writing up the business records at home, a reasonable estimate is accepted by HMRC.
How to apportion the cost between business and private use
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.
Some of the types of expenditure that may be allowable
Insurance
If the business use is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed. Otherwise, an appropriate part of the premium can be allowed.
Mortgage interest
If part of the home is used solely for business then an appropriate part of the mortgage interest is an allowable deduction. Repayments of capital are not allowable.
Rent
Part of the rent is an allowable expense when the home is rented and part is used solely for business purposes.
A sole trader cannot charge a separate rent to his or her own business. The allowable expense is the proportion of the rent paid to the landlord.
Council Tax
The council tax is a tax on property. In principle it may be allowable in those instances where other property based expenses are deductible.
Repairs and maintenance
A proportion of the cost of general household repairs and maintenance is allowable in line with the proportion that the house is used solely for the business. Examples include the general redecoration of the exterior or repairs to the roof.
Repairs that relate solely to part of the house that is not used for the business, such as decorating a room not used for the business, are not allowable. Equally if a room is used solely for business purposes then the cost of redecorating that room is wholly allowable.
Cleaning
The facts may result in a higher proportion of costs attributable to either business or domestic use. For example, a cleaner may clean the living rooms but be under strict instructions to leave the office alone. In this situation, the payments to the cleaner are not an allowable expense.
Heat, light and power
A proportion of the heating and lighting costs of a room used at times solely for business purposes is allowable. The proportion should reflect the facts of usage.
You should take into account the number and nature of any power consuming items involved. A commercial photographer working from home using specialist studio lighting will have a much higher business expense for electricity than a trader writing up records once a week in the spare bedroom.
Telephone
The cost of business calls is allowable, also a proportion of the line rental (based on the ratio of business use to total use). This proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure.
Broadband
Expenditure on an internet connection (including broadband and wireless broadband) is allowable to the extent that the connection is used for business purposes. Where there is ‘mixed’ (business/non-business) use, follow the approach used for telephone rentals.
Metered water charges
In cases of heavy usage the business part of the property may be separately charged (and so fully allowable) in which event none of the domestic cost is deductible.
In the case of minor business use of the premises, such as writing up records, there is no business use of water and so none of the water charge is allowable.
Capital expenditure
Capital expenditure (for example on improvements to the property) is not allowable expenditure; though plant and machinery allowances may be appropriate for certain qualifying expenditure.
Click here for HMRC worked examples.
Capital gains Tax Implications
When you sell or dispose of your own home you don’t usually have to pay any Capital Gains Tax – as long as for all the time that you’ve owned it both of the following apply:
- it’s been your only home or main residence
- you’ve used it as your home and nothing else
If you use your home for business purposes you can still get the full amount of the relief as long as you keep using all of your house as a home. For example, the room you use as an office may also be used as a guest bedroom.
But if any part of your home is used exclusively for business purposes, for example part of your home is used as a joiner’s workshop, then capital gain tax may be due on part of the home. A detailed calculation would be required.
