What can I claim for when using my home as an office?
For many Limited Company contractors it doesn’t make financial sense to rent out office space. Instead, a room or area in their own home is set aside for business use. This provides the convenience and flexibility of working at home on the tasks needed to run the business as and when the demands of fee earning work allow.
If this is how you operate your own business you’re likely to be able to claim a use of home as office allowance from HMRC. This allowance recognises that many smaller businesses legitimately conduct part of their business from home and incur related expenses. The rules around claiming are quite stringent, but nonetheless it’s worth claiming what you’re entitled to rather than missing out.
HMRC rules for use of home allowance
The general rule is that tax deductions for home office use only apply to expenses that are wholly and exclusively for the business. In many cases working from home involves use of space and resources that are in private use much of the time, only partly being used for business purposes. Generally, as long as the expenses claimed are reasonable and match the kinds of expenses a business like yours would usually incur, HMRC are likely to accept them. Just make sure that you’re able to justify each expense if HMRC asks you to do so.
There are two methods used to calculate use of home allowance claims: the Flat Rate or the apportionment basis.
Flat rate method for use of home claim
This is the easiest to work out and does not require any records to be kept or evidence of expenditure. HMRC publishes rates each year, the current use of home allowance for April 2014/2015 is £4 per week making a total of £208 per year. Not much, but better than nothing!
Apportionment basis method for use of home claim
This is more complex to work out but if you do a lot of work at home the effort can be worthwhile. You’ll need to keep the invoices and receipts of all relevant expenses, as well as a record of the basis and detailed calculations of the business portion you’re claiming for. This is generally apportioned with reference to the number of rooms in the house, and the amount of time that you use your office space for business purposes and private purposes.
The apportionment basis splits property costs into fixed and running costs. You can potentially claim for both, as well as for items of capital expenditure such as office equipment. The amount of the claim will be for the portion of use that is applied to your business.
Fixed costs – these are items that apply to the property itself, such as Council Tax, mortgage interest, water rates, insurance, repairs or rent. It’s important to only include HMRC allowable fixed costs, which must be related to actual business use. When claiming for insurance costs, if there is a separate policy for the business then this would be allowable in full. Otherwise you can claim a proportion of the general household insurance using your business use apportionment calculated above.
Any expense that relates to the house as a whole can be apportioned and included in the home as office claim, for example exterior painting of the whole property or even garden maintenance if customers visit the property regularly. However if the repair relates solely to a part of the house that is not used for business purposes then it would not be allowable, such as decorating the lounge when this is never used for business purposes.
Running costs – these are items which vary with use, such as light, heat, power, telephone and broadband. Only allowable costs should be included and elements such as floor space and duration of business use should be factored into the calculation.
Some running costs also have a fixed element, such as fixed line rental on a telephone. Again, the business use portion would need to be calculated to work out the amount which can be claimed.
It is worth bearing in mind that as long as a part of your house is not used exclusively for business purposes, then there will be no question of a capital gain when you sell your house at a future date. If a part of your home is used exclusively for business purposes there may a case for HMRC to disallow the Principle Private Residence Relief on that proportion of the sale proceeds on a future sale.
Your contractor accountants will be able to provide expert advice on these calculations to help you claim the maximum allowance available to you, whilst not becoming liable to capital gains tax on any future sale of your home.
For more detailed information on this topic, including worked examples of how the use of home allowance might apply, download the Intouch Contractors Guide Use of Home as Office.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.