Claiming tax relief for the cost of using your home (and more!)
Are you claiming all the expenses you are entitled to?
If you are in business you will do at least some work from home. Make sure you are claiming the cost for tax purposes, even if the use is incidental.
There are different potential scenarios:
- Business operated wholly from home
- Some business carried out at home – some on other premises
- Only incidental duties carried out at home
But in all cases there will be costs you can claim – which will save you tax.
General rules for expenses
Certain expenses your business incurs will be allowable against tax. It is important to know the significance of whether an expense is or is not tax allowable when working out how much tax you have to pay. It is therefore helpful if you understand the logic behind what is and what is not tax deductible
It would be lovely to be able to provide a definitive list of expenses that are deductible for tax purposes, but unfortunately this is not possible. It is the nature of the expense that is important, rather than the expense type. For example there is a difference between expenses incurred directly by a business (such as accountancy fees – which are billed directly to the business) and those that are incurred by you as an employee and then claimed back periodically.
What is an allowable expense
For a business expense to be allowable, it must be incurred “wholly and exclusively” in performance of the trade. Example – accountancy fees are allowable, but say a payment for you to join your local Gym may not be (unless this payment is a condition of your employment). But beware – just because an expense is allowable against your business’s profits does not necessarily mean that it is tax efficient.
Now extend the example of the gym fees and assume that you do have an agreement in place that it is a condition of your employment that the business pays your gym fees. In this case, although the business will be able to offset this expense against its profits, you personally will receive a tax and NI charge on this payment as a “benefit-in-kind”. This charge will be calculated on the value of any benefits you receive from the business which are not taxed at the time of payment. Taxable benefits can be processed through the payroll or reported annually on an HMRC form known as a P11D.
The reason for this apparent anomaly is because there is a difference between expenses that are tax deductible for a business to those that are deductible for an individual.
Expenses that are tax deductible for an individual are those that are incurred “wholly, exclusively and necessarily” in the performance of the duties as an employee. The additional qualification is “necessary” – which is a much more difficult step to climb. In our example, the gym fees do not qualify as a deduction against your personal tax liability. By comparison a taxi fare that you incur while visiting a customer of the business will be deductible. So in the case of your taxi fare, it is both allowable against the business profits and is not taxable on you as an individual – because the expense is incurred “wholly, exclusively and necessarily” by you in the performance of your duties.
Using your home
In the case of rent, you can make a charge to apportion some costs to your business based on the part of your home used and the amount of time spent. As part of this apportionment calculation, an allowance must be made for using any space also as a bedroom/sitting room and therefore privately. Significantly, HMRC consider that mortgage interest and Council Tax is not allowable in any proportion as a business expense in your calculations. In theory they will only allow the additional costs incurred in running your office from your home.
In practice, particularly where either your business is run from home or you carry out far more than incidental work there, you can claim a proportion of the total costs. We recommend you do this by apportioning the costs of the whole. If you have a dedicated area set aside exclusively as an office then this is simple – otherwise make a reasonable estimate.
In other cases where you are not using a clearly defined area for more than incidental use we advise that you claim only £4 per week for “Use of Home as Office”. This is a nominal amount you can claim based on the current HMRC guideline and is exempt from tax and NI.
Income tax
If as opposed to a recharge of costs you effectively charge a rent to the business for the use of the home, then in theory this should be reported on your tax return where there is a profit element. This will not be tax free under “rent a room” relief, but it is possible this would be tax free under other personal allowances.
Capital gains implications
A home is possibly the best investment – because when you sell your home it is not normally subject to Capital Gains Tax (CGT). However if a discreet part is used exclusively for business then any profit on sale would proportionately be subject to CGT. In order not to incur this charge you only simply need to be able to demonstrate that no area was used exclusively for business – only mainly. So if your “office” at home also has a sofa bed and / or television where your children or guests stay, even occasionally, no CGT would apply.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
Related Blog
Do you claim £300 of tax free benefits every year?
These benefits are not so trivial This is NOT some sort of tax avoidance. The Finance Act 2016 introduced a statutory exemption from tax for “trivial” benefits in kind. All you need to know is what you can claim and when. You don’t have to pay tax on a benefit for your “employee” if all — Read more
