Many businesses are conceived in a spare bedroom or dining room (as did Sleigh & Story!). Even when they’re well established, many business owners work from home some of the time during the evening or at weekends.
If you work from home you can claim part of your household costs as a tax allowable expense.
Almost every business owner can claim for ‘use of home’. Almost all business owners do some work from home, be it talking to a customer or doing some paperwork.
It’s amazing how many people think they’re not entitled to the ‘use of home’ deduction: there are so many popular misconceptions about it.
Many people think they can’t claim because they’re already claiming for an office, a shop, or other business premises. Although the amount of the claim is likely to be less, a ‘use of home’ claim is still possible as long as some work is carried out at home.
Claims should be based on the proportionate use of the property for business. The main factors to consider are how much space is set aside for business use and how much time is spent on business.
There are many possible methods for calculating the business proportion. In practice, the most popular method is to simply take the number of rooms used for business as a proportion of the total number of rooms in the house. Hallways, bathrooms and kitchens are excluded from the calculation.
Example John is an architect and uses a room in his house as his office.The house also has three bedrooms, a living room, two bathrooms and a kitchen. We can ignore the bathrooms and the kitchen, so this leaves five rooms for the purpose of our calculation, meaning that John can claim one fifth of his household costs. So, if John’s annual household costs amount to £20,000 and he uses the office room exclusively for business, this entitles him to claim a tax deduction of £4,000.
A self-employed person working from home is entitled to claim a proportion of most household costs, including:
• Mortgage interest or rent
• Council tax
• Water rates
• Repairs and maintenance
• Building and contents insurance
• Gas, oil or other heating costs
Telephone and internet costs may also be claimed, where relevant, although this tends to form a separate claim as the business element of these costs are usually a higher proportion than for other household costs.
A proportion of general repairs and maintenance costs relating to the whole property, such as roof repairs or gas maintenance costs may be claimed.
Costs which are specific to an area used for work may be claimed in full – subject to any reduction required for partial private use of that area.
Redecorating an office used for work would be an allowable cost, for example. The opposite of this is that any costs specific to a wholly non-work area may not be claimed at all.
Annual Investment Allowance may also be claimed on any furniture and equipment used for business, with immediate 100% relief usually available, subject to a reduction for any private use.
Floor Space Instead of Rooms
In the earlier example with John the claim was based on the number of rooms used for business purposes.
This method is simple, but it is worth considering whether another method may obtain a better result. What if John’s architecture work requires a large amount of space and the room he uses is the largest in the house?
In this case, it would be better if John did his calculation based on floor space, as this would produce a greater deduction for tax purposes.
Should John’s office require specialised lighting which consumes a lot of electricity – he may be able to claim a higher proportion of his electricity costs.
You need to be careful when isolating costs in this way though. Moving away from the simple method may cause problems; you will need to be consistent and there may be other parts of your claim which go the other way, leaving you worse off than when you started.
In particular, HM Revenue and Customs (HMRC) takes the view that ‘fixed’ annual costs such as mortgage interest, council tax and insurance need to be allocated on the basis that a room is available for private use whenever it isn’t being used for business.
This method is not widely followed in practice but HMRC may attempt to impose it in the event of an enquiry, as it will often lead to a substantial reduction in the claim.
It may be worth thinking about the impact on your claim of a room with little or no use of any kind.
Let’s suppose that Billie never uses his dining room. The room’s mere existence means he is claiming just one fifth of his household costs. Arguably, if the room is never used, he might justifiably claim a quarter instead.Better still, Billie should start using the dining room for business.Then he could claim up to two fifths of his household costs(depending on how much he uses the room).Using a room for business can take many forms – completing paperwork, taking business calls, meeting customers, storing files or other business items – even just sitting there thinking about your business.
Reduce Your Claim and Avoid CGT
When there is some private use of a room used for business, you will need to restrict your home office claim. For example, let’s say once a week, Billie has some friends round for a game of poker and they use his office. They play for about four hours each week. Billie works in his office for 46 hours a week on average, so his business use amounts to 46/50ths, or 92%. With total annual household costs of £20,000 and five rooms to be taken into account, this means that John may now claim a deduction of £3,680 (£20,000 x 1/5 x 92%).
“Why don’t they play cards in the dining room?” you may ask.
One possible reason is that Billie wants to protect his Capital Gains Tax (CGT) exemption. The CGT exemption which you usually get when you sell your home is restricted if part of the house has been used exclusively for business.
Fortunately, as long as there is some private use of each room in the house, no matter how small, your CGT relief is safe.
In fact, you can counter-balance that small element of private use of your ‘work room’ with a small element of business use in another room, thus restoring your Income Tax deduction to its previous level with no loss of CGT relief.
For example, if Billie used his dining room for business 8% of the time, his total claim would be restored to the original one fifth. In cases like this, it is wise to make a note of the logic behind your claim in case of any later enquiries.
For smaller properties, looking at floor space or number of rooms may be unsuitable and it will often make more sense to make claims on a time basis instead.
Donna is a self-employed web designer. She works at home in her small one bedroom flat. Because her flat is so small, Donna is effectively using the whole flat for business when she is working. Conversely, of course,when she isn’t working, she is using the whole flat privately. In this case, we could use what I call the ‘work, rest and play’ principle -assuming that Donna spends an equal amount of time on each, she should claim one third of her household costs. Many self-employed people work more than a third of the time, so a greater claim will sometimes be justified. Since HMRC staff are not self-employed, it may be wise to retain some evidence of your actual working hours in order to convince them of this!
Those who work from home only part of the time, such as at evenings and weekends, will need to reduce their claim accordingly.
All of the methods for allocating household costs described above remain available, but a further reduction in the claim must be applied to reflect the part-time nature of the business use of part of the home. Establishing this reduction needs to be considered on a case by case basis. The key watchword to remember is: be reasonable!
Let’s say, for example, that you use your dining room for business purposes around 20 hours each week, but the room is also used privately (for meals, the children doing their homework, etc) around 30 hours each week. So, 40% of the room’s total usage is business use.
Let’s also say that there are five other rooms which we need to take into account (excluding hallways, bathrooms and kitchen, as usual) and your total annual household costs are £18,000. In this case, it would seem reasonable for you to claim £1,200(£18,000 x 1/6 x 40%) in respect of business use of your home. As your dining room is used quite extensively (50 hours per week in total), it does not seem necessary, in this case, to look at ‘fixed’costs like council tax and mortgage interest, differently to‘variable’ costs like electricity.
Let’s look at another example, however.
Freema is a self-employed freelance medical consultant and she does some occasional work at home amounting to around three hours per week on average.
Based on the usual test, her flat has three rooms to be taken into account, including the spare bedroom which she only uses for work and for the occasional guest. She has very few guests, so her business use of the spare room amounts to 90% of the room’s total usage.
Freema’s total annual household costs amount to £12,000. If we used our usual formula, this would produce a claim of £3,600
(£12,000 x 1/3 x 90%).
However, taking a reasonable view, we see that this amounts to a ratherridiculous and unsustainable claim of over £23 per hour of business use.Hence, in this case, it seems reasonable to apply HMRC’s approach,whereby ‘fixed’ costs are allocated on the basis that the time that a room is not being used at all should be treated as private use. Let’s say that Freema has £10,000 of ‘fixed’ costs and £2,000 of variable costs. There are 168 hours in a week, so her tax deduction is now calculated as follows:
Fixed costs: £10,000 x 1/3 x 3/168 £60
Variable costs: £2,000 x 1/3 x 90% £600
Total claim: £660
This is a much more reasonable and sensible claim in Freema’s case.
For the purpose of these types of calculations, fixed costs would include:
• Mortgage interest or rent
• Council tax
• Water rates (but not if the supply is metered)
• Building and contents insurance
Small Claims Caught
For cases where there is only minimal business use of the home, HMRC’s own manuals suggest that claims of up to £2 a week (or £104 a year) should not generally be challenged (although there must be some regular business use). This is particularly useful for those with only a small amount of work to do at home, such as a landlord with just one rental property.
It isn’t much, but it saves the effort of doing any more complex calculations.