Are you working from home? Then this final tip in the series will be of interest to you!

How your home office can help reduce your tax bill

Whether you are a sole trader or a director of a limited company, your home office can help to reduce your tax bill providing there is a genuine need to work from home. However, the level of benefit and the rules differ depending on your trading structure.

Non VAT registered Self employed/Sole Trader

As a sole trader you have two choices

1. Simplified expenses for the self-employed – With this method, you can claim a flat rate for your allowable expenses (except telephone and internet expenses, see below) based on the number of hours you work from home each month. The table below shows the flat rates to be applied.

NB A minimum of 25 hours per month working from home is necessary to qualify and you must not be VAT registered.

Hours of business use per month Flat rate per month
25 to 50 £10
51 to 100 £18
101 and more £26

Telephone and Broadband

What can be claimed?

  • Line rental cannot be claimed as you would have to pay it anyway for your domestic use However, line rental can be claimed if you have a separate business line.
  • Business calls can be claimed for providing they can be identified on the telephone bill.
  • Broadband is treated in the same way ie it cannot be claimed unless it is a separate facility and used 100% for business purpose

2. Calculating actual costs and the proportion of personal and business use – If you wish to claim more than the amounts allowable with the simplified method, then you can calculate a proportion of the cost of your bills attributable to business use. HMRC do not have a formula or exact method for calculating this, they simply say that you need to divide your costs between business and personal in a way that is “reasonable”. It goes without saying that very accurate records are vital for this.

Let’s take the heating bill for your house as an example.

  • Evenly divide it by the number of rooms (HMRC understand that room sizes vary but are happy to accept the assumption of all rooms being the same for simplicity of calculation). This will give you the cost of heating your office for the period of that bill.
  • Calculate a usage rate by multiplying the cost for your office by the percentage of time that it is used for business purposes.

    Household heating bill for the period = £500.  There are 9 rooms in the house therefore £500 divided by 9 = £55.50 per roomIf you are working in your office for 80% of the time that it is heated then the calculation would be as follows; £55.50 x 80% = £44

£44 would be the amount that you could claim tax relief for in respect of heating your home office for the period of the bill.

HMRC allows you to deduct two types of costs: fixed costs and running costs. Your business use proportion of these expenses can be claimed against tax. These costs are as follows;

Fixed costs:

  1. Rent
  2. The interest on your mortgage but not the repayment itself
  3. Council tax
  4. Insurance (unless you have separate insurance for your business in which case the full cost is tax deductible
  5. Repairs and maintenance

Running costs:

  1. Heating, lighting and electricity
  2. Water and sewerage
  3. Phone and broadband
  4. Cleaning.

Limited Company Director

Limited company directors have three ways in which they can claim tax relief but again, the home office needs to be the main place of work rather than just “extra” bits of time over and above another site/at your client’s premises.

  1. Simplified method – HMRC allow a flat rate of £6 per week (£312 per year) to be claimed, without evidence, for the cost of running your home office in respect of gas and electricity. For tax relief purposes, telephone and broadband are dealt with in the same way as for sole traders (see above)
  2. Rent your work space to your limited company – If you wish to claim more than the £6 per week you may be able to set up a rental agreement between you and your limited company. HMRC does not permit limited company directors to claim a proportion of rent, mortgage interest or council tax in respect of their home office because these costs would have been incurred personally anyway. However, Limited company directors can charge the company “rent” for the space that the business uses within their home providing that this rental income is disclosed on their annual self-assessment form and a contractual rental agreement is set up leasing the office space to the business. This arrangement is favourable from both personal and business points of view; personally, the rental income will contribute to your mortgage payment and business-wise the rental payment can then be claimed against your corporation tax bill.
    NB to avoid Capital Gains Tax – If you have a dedicated office at home then it is worth considering giving it another use such as putting your exercise bike in there and letting it double up as your “gym” otherwise if a room has been dedicated solely to business use then you will be liable for Capital Gains Tax if you come to sell your home.If you have the option to use a separate building on your residential premises then you can claim the full cost of running and maintaining that building if it is used solely for business use or opt to claim a proportion of the cost if the building has shared residential use.

What about costs incurred in setting up a home office in the first place?

  • Structural changes, refurbishment costs of an additional external building
    Any costs incurred for structural changes to your home or refurbishment costs in order to accommodate a home office can be paid for by your business but they do not attract tax relief as they are a setting of the business and therefore capital in nature. Also note here that if a separate building is built on your residential premises, but paid for and therefore owned by your business, then the building will be a business asset rather than a personal one and therefore more complex tax rules apply.
  • Office furniture and computer equipment
    The purchase of office furniture, together with computer and other equipment is fully tax deductible (by claiming the investment allowance) and as a result will be a corporation tax saving. Providing that you are using the equipment solely for business purposes, there will be no benefit in kind charge and therefore no personal tax implications either. This would be the most tax efficient way of setting up your home office and there is unlikely to be any reason for HMRC to challenge it.

Whether you’re a sole trader or a limited company director, the key question to ask yourself when it comes to claiming tax relief for the costs of your home office is: are these expenses genuinely for business purposes and can I prove it?

We hope you have found this tax-saving tip interesting and informative. If you have any questions or would like further information about using your home office to reduce your tax bill, please contact Trinity on 02475 185286 or complete our online enquiry form.

As a thank you for reading all of the tips in our tax saving series, we’ve got one final bonus tip coming up for you tomorrow.