As many small businesses operate from home, costs can be incurred where it is possible to obtain tax relief against business income. Detailed below are the various methods that can be used in determining the allowable expense for sole traders, business partnerships and small companies.
Sole traders and business partnerships
Flat rate deductions – business use of home
From 2013/14 HMRC have introduced some fixed rate expenses that can be taken advantage of by sole traders and business partnerships. One of these relates to business use of home (These simplified expenses will be detailed in an online article next month).
The flat rate deduction can be used as an alternative to recording actual expenditure and apportioning business element. This rate includes all household running costs such as heat, light, power, telephone and broadband/internet costs and is based on the number of monthly average hours worked at home. The monthly rates are detailed below.
25 or more hours worked per month - flat rate of £10 per month
51 or more hours worked per month – flat rate of £18 per month
101 or more hours worked per month – flat rate of £26 per month
It would be advisable to review the business proportion of home telephone and internet costs before using the flat rates.
If a business does not wish to use the simplified expenses for business use of home, then where private use of telephone/internet costs does not form a significant proportion of the service use, HMRC will accept that the full amount of expenditure can be claimed. However business will need to use the normal statutory method of calculating the business use of home costs as detailed below.
Normal method calculating – business use of home
You can claim a proportion of the annual home costs such as insurance, council tax, mortgage interest, rent, water rates and running costs each year such as heat, light and power. You need to be able to justify the claim and the calculation would normally be based on the number of rooms used for business use compared with number of rooms in the house. You should also take into account the number of hours worked in the room at home. If only one room is partly used at home for business then there should not be any capital gains tax implications (loss of private residence exemption) but care needs to be taken if claims are made where there is sole use of a number of rooms for business use.
Small companies
Unfortunately directors working from home for small companies cannot claim business use of home costs in the same way as sole traders/partnerships’ working from home as these costs are not incurred wholly, exclusively and necessarily for their employment.
If considering charging a rent to company then in order to obtain the same effective treatment as a sole trader you would need to set up a rental agreement between the company and individual (director). The rent in effect would equate to the ‘business use of home’ costs and as long as rent did not exceed commercial arm’s length amount then rent would be allowed as deduction in arriving at taxable profits for corporation tax. The rent received by the individual (director) would need to be declared in self assessment tax return but would be offset by costs calculated for ‘business use of home’ leaving a nil profit from the office rent.
Again care should be taken with the rental agreement to avoid any loss of private residence relief. The agreement should state that the home room/facilities are only let to company for specific hours in the week.
Employee/ (directors) allowable tax relief for household expenses
If you wish to avoid problems associated with charging rents then HMRC have agreed rates that can be used by employees or directors to claim tax relief on household expenses.
These expenses cover extra cost of gas and electricity to heat and light your work area and business telephone calls. You won’t be able to get tax relief on mortgage, council tax, telephone line rental or Internet access. In order to obtain tax relief on land lines and broadband at home then it is important to have a designated phone line/broadband and the contract in the company name.
From 2012/13 the agreed HMRC rate for household expenses (without keeping documentation) amounts to £4 per week or £18 per month. For amounts above £4 you will need supporting evidence to show that the amount you are claiming is no more than the additional household expenses you have actually incurred.
The guideline rate for 2008-09 to 2011-12 was £3.00 per week and for 2007-08 it was £2.00 per week. For further details see HM Revenue & Customs: Tax relief for household expenses when working at home
Please contact us if you require any advice on expenses that can be claimed for business use of home.