Use of Home as Office
With advancements in technology and software it is becoming more common for people to choose to operate their business from their home but many are losing out on the tax benefits of doing so as they do not claim what they are entitled to. There are essentially 3 ways that you can calculate your claim but there are also some things to watch out for to ensure you do not fall foul of HMRC.
Detailed Use of Home
The following example is a guide only and intended to demonstrate the principles to be applied. The example is not intended to be prescriptive; each case will be dependent on the facts. The example calculates expenses on the basis of number of rooms and hours. HMRC are happy that you ignore the kitchen, hallways, bathroom and toilet from the number of rooms as they are deemed ancillary to the rest of the house. A different or more accurate calculation may create a different result when taking into account actual usage and other factors. Use of rooms as a basis of apportionment may give you a skewed result if your office is small and other rooms large. Use the basis which is most appropriate to your circumstances.
You may wish to charge the business a market rate rent which you are entitled to do and could prove useful in using up any unused personal tax free allowance. Please bear in mind that any rent received over and above the costs incurred will be taxable and need to be entered on your personal tax return. This may though provide a better alternative to additional salary as no NI would be due and if you are a lower rate tax payer be a cheaper alternative than taking additional dividends. Charging a market rate rent is specific to the individual persons situation and we do recommend you seek professional advice.
Detailed Use of Home Example
Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours.
The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.
After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480).
The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.
If you are a client of Smart Accountancy Systems please contact us for a Use of Home Calculator.
If Gordon were to charge the business a market rate rent of say £400 per month then his annual rental income would be £4,800 and his costs £680 making a profit of £4,120 to declare on his personal tax return. Please note that this arrangement is only available for owner-manager of Companies and not the self-employed. The cost to the company for the rent is tax deductible so in this example the potential Corporation Tax saved would be £4,800 x 20% being £960 saving.
More examples can be found at:
Note on expenses
Telephone costs are not included in this calculation as it is assumed that the business would either support a dedicated phone line or that any claim for the use of a private be claimed separately based on actual use. The same is to be said of the broadband. If however there was no separate business broadband then it could be apportioned by time used. Don’t forget that in order to make this claim you would need to be able to substantiate that claim so don’t forget to log every minute spent online unless the private usage was minimal.
Water rates and sewerage may be disallowed by HMRC if the business use is minimal.
General repairs and cleaning to specific parts of the property should be apportioned to the specific elements of the house i.e. a repair to a specific room which is not used by the business is not allowed.
As long as the property is used by the company for its business, it can deduct from its profits the rent paid to you. This will therefore reduce your Corporation Tax liability. You will be liable to pay tax on this income net of expenses.
It’s sensible to set the rent at a level that at least covers your costs, but not much more than this. If you were a higher rate tax payer for example the saving made in Corporation Tax would be negated by the additional Personal Tax to pay. The arrangement should be formalised by an agreement which gives the company rights to use your property, but not rights over ownership.
If you are a client of Smart Accountancy Systems please contact us for a Licence Agreement.
You don’t usually have to pay business rates for home-based businesses if you:
- use a small part of your home for your business, eg you use a bedroom as an office
- sell goods by post
You may need to pay business rates as well as Council Tax if:
- your property is part business and part domestic, eg if you live above your shop
- you sell goods or services to people who visit your property
- you employ other people to work at your property
- you’ve made changes to your home for your business, eg converted a garage to a hairdressers
Contact the Valuation Office Agency http://www.hmrc.gov.uk/manuals/cgmanual/CG64663.htm
Minor Use of Home
Where there is only minor use of the home for business purposes HMRC may accept an estimate of the allowable business costs without evidence of a detailed calculation. Guidance provided by HMRC for employees who are required to work from home suggests a reasonable deduction is £4 per week. A similar approach could be used for a self-employed individual where the time spent working from home is not significant enough to warrant the detailed approach suggested above.
Simplified Expenses for Self-Employed
Calculate your allowable expenses using a flat rate based on the hours you work from home each month.
This means you don’t have to work out the proportion of personal and business use for your home, eg how much of your utility bills are for business. For those just working from the dining room table for a day per week might feel like an easier solution but don’t forget to compare this method against our calculator to work out which one is more favourable.
The flat rate does not include telephone or internet expenses. You can claim the business proportion of these bills by working out the actual costs. Easier said than done. If you have a business dedicated line though that does make matters much easier but that cost would be claimed through your business and not on your use of home.
You can only use simplified expenses if you work more than 25 hours per month from home so you need to keep a log of your hours.
|Hours of business use per month||Flat Rate per Month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
Simplified Expenses Example
You worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:
10 months x £10 = £100
2 months x £18 = £36
Total you can claim = £136
You can chop and change the method used each year so in some instances it may be worthwhile calculating it using different methods to see which one provides the best return.
Published: February 2015
Next Review Due: