Are you missing out on work-from-home expenses?
Posted on 18th July 2019
Having the option to work from home is one of the most appealing things about being self-employed, and it is becoming more common for people to start their own businesses for the flexibility it offers.
One of the most common queries I receive from contractors and other business owners is whether they can claim the cost of their rent if they work from home. In short, whether you work from home or have separate dedicated business premises, you can claim the associated costs through the company and they will be tax deductible. The trick, however, is knowing what you can claim and how to calculate it.
Renting office space
Quite simply, if you rent office space, your limited company can cover the full costs of the rent, rates (if applicable), utilities and telephone and broadband connections. This applies equally to ad-hoc room rent or a full business lease.
If you run a limited company and you have an office in your home, you have the option of renting the office to your limited company and claiming that as an expense. If you do this, you need to set up a formal rental agreement between yourself – the homeowner – and your limited company. If you do not set up this formal agreement, HMRC may consider the rent you receive from your limited company as an extra salary, and this would then be subject to tax and national insurance. By drawing up the rental agreement, your limited company is able to deduct rental payments from the company’s pre-tax profit – and this then reduces your taxable profit (so you save corporation tax!).
If you choose to go down this route, it is important to check with your accountant how to approach this from a tax perspective to ensure you are being as tax-efficient as possible. It can be quite complicated, and some people prefer to take a more simple route.
Working from home
If you’re working from home, your limited company can repay you for some costs associated with running the business.
You can do one of two options, which are as follows…
Option 1: Claim the basic allowance
You can claim up to £4 per week (or £18 per month) without having to itemise or justify the costs to HMRC. This basic allowance is designed to acknowledge you writing up business notes, invoices and general ad-hoc administrative tasks at home.
Option 2: Claim the apportioned cost
If you work from home at least one full day per week and you have dedicated office space in your home, you may be able to claim a proportion of your household bills.
The amount you can claim will depend on a few variables. The first is the area used for your work. What proportion of the area of the house is used for business? The second is usage. How often do you use the area for business, and how long for? The third and final variable is the costs associated with running your business. What costs can you clearly attribute or apportion to this usage?
The costs you can apportion include mortgage interest (excluding any repayment element), rent, water, gas and electricity. You may also be able to claim a proportion of your landline and broadband costs if you use these for work.
If you choose to use the apportioned method, you’ll need to ensure you can prove that you have a functional workspace that is used exclusively for business. You’ll also need to be able to provide evidence of your calculations to a HMRC inspector, if requested.
Be careful claiming for internet and telephone costs
You must have bought your internet connection and your telephone contract (mobile or landline) in the name of your limited company for you to be able to claim the cost.
If you have an internet connection bought in your personal name, you normally wouldn’t be able to claim anything back on this, as you will be using the internet for personal reasons as well as business ones. However, if you have a separate broadband connection for your office at home, and that connection in particular is for internet access solely to that area, you can claim the internet costs for that separate line.
Claiming full tax relief on your telephone bills, whether mobile or landline, is similar. You must have a contract between your limited company and your provider – and any personal calls made from your business phone are treated as a benefit-in-kind and must be listed on your P11D form (which is used to record benefits-in-kind).
What about if I’m a sole trader?
If you work from home as a sole trader – so not as a limited company director or contractor – and you work from home for a minimum of 25 hours per month, you can claim simplified expenses. This is a flat rate that you claim based on the hours you work each month. In addition to the flat rate, you can also claim the share of your telephone or internet costs that you use for your business, as these are not included in the flat rate allowance.
The flat rate amounts for simplified expenses are as follows:
25 to 50 hours worked at home per month: £10
51 to 100 hours worked at home per month: £18
101 or more hours worked at home per month: £26
It is often easier to just claim simplified expenses as a sole trader, as you do not need to make any complicated calculations and you won’t need to worry about accidentally claiming for something you shouldn’t!
If you are in any doubt about what you can and can’t claim as a self-employed person working from home or in rented office space, you should endeavour to speak to an expert. It isn’t worth risking an HMRC visit if you’re not 100% certain you’re making the correct expense claims – a tax inspection can result in heavy fines and even a criminal record, even if you have made an honest mistake.
Download our infographic here for more details on what you can and cannot claim.
Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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