Use of Home as an Office
Many people, including Directors, Employees, Sole Traders and Partnerships are now using their home as a working base.
It is not enough for the expense to just be relevant to the employment or incurred in connection with the work – it must be ‘wholly, exclusively and necessarily’ incurred.
So what can you claim if you are in this position?
Flat Rate Expense
HMRC permit payments by the business of £6 per week (known as a flat rate expense) as ‘additional household expenses’ to be paid ‘tax free’ without the need to substantiate the figures ie no receipts or invoices required.
What if the business doesn’t pay it to the Director or Employees?
If no home allowance is paid by the company then the director or someone who is self- employed can claim the £6 deduction on his or her own tax return or via a change in their tax code to increase their personal allowance
Employees who do not fill in a self-assessment can claim this £6 per week through HMRC by having their Tax Code increased so they can earn more before paying tax.
An Alternative to claiming a flat rate expense
There is an alternative to claiming the flat rate £6 a week. If your home working expenses are considerably more than £6 per week a higher claim will be required, so how do you do this?
Typically, HMRC will allow a higher claim so long as the amount has been calculated on a reasonable basis, and that such claims are not excessive.
One calculation method is to estimate the proportion of the home used for business
So add up all your general household expenses bills (electricity, gas, council tax, rent/mortgage interest but not the capital repayment made).
Calculate the number of rooms in your house (Not including bathrooms, kitchen & hallways)
Calculate how many rooms you are using for business and divide by the above available rooms
Calculate how many hours you spend working in those rooms and divide by the number of hours in a week
Total household bills £12,000
No of Rooms in house 6
Used rooms 1
No of hours used 40
Hours in week 168
So £12,000 * 1/6 * 40/168 = £476 to claim
Depending upon the size of the property and mortgage, these pro-rata costs can result in a higher claim than that allowed under the other more basic £6 per week claim. Evidence (copies of bills and calculations) of why a claim in excess of the £6 a week will be required to support this higher claim.
Renting a Room
Another way of withdrawing tax-free money from the company is where a director uses a room in his home as the company office. The room need not have exclusive use as an office, so long as when it is used it is used for business purposes. The company pays rent for the use of the room claiming full corporation tax relief.
Obviously, HMRC do not have the legal power to tell a landlord how much rent to charge, however, as the property will be rented to a ‘connected’ person (the director) it is likely that HMRC will ask for confirmation that the rent being charged is at a commercial/market rate.
If the rent is less than the market rate then HMRC will enforce the rules which centre round the amount of expenses that can be claimed as a deduction from the rental income received and not allow the full amount of expenses incurred.
However, as a concession HMRC will allow the landlord to claim a total amount restricted to the rental income derived from that property. Expenses incurred in excess of this figure are not allowed to create a loss.
Payment can be monthly, quarterly or annually, evidenced by the payment being made from the business bank account to the personal current account rather than as a credit to the directors’ loan account because this will create a clear distinction between company money and personal money.
There should be a formal written rental agreement between the owner/occupier and the business itself stating that the agreement is for at least one year applying to non-exclusive use of the room as an office. If there is only infrequent use of the office then further pro-rating is required.
Things to note when renting a room
- It would be preferable for a room not to be given over solely to business use, as this could result in a restriction on the capital gains tax principal private residence (PPR) relief claim on sale. PPR cannot be claimed for any part of a main residence used exclusively for business use, but on the other hand, the gain relating to the use of one room may be below the annual CGT exempt amount i.e. £12,300 (x 2 for a couple) and not be charged.
- The room should include some personal items (e.g. bookshelves, television, etc.) to reduce the possibility of a CGT charge.
- Business landline telephone and broadband costs (with an appropriate restriction for private use) are usually claimed separately such that they need not be included in this calculation.
- The amount paid under this arrangement must not be more than a commercial rent