Working from home as a sole-trader and wondering what home-office expenses are tax deductible? Or maybe you are a business owner and wondering what tax deductibles you can claim for, under staff expenses?
In the last year we have seen a huge increase in the home-working options businesses provide. In fact, the Office of National Statistics reported that in April 2020, as many as 46.6% of the UK workforce was working from home in some form. 86% of whom were home purely because of the restrictions caused by the Coronavirus Pandemic and whilst many may return to traditional office spaces in the future, some businesses have made promises to their workforce, that working from home, for part, or the entire week may be possible going forward.
So where do you stand on home-office tax deductibles? And how do you claim for them?
Here at Valued we want to make sure you have all the information you need come tax return time.
The four home-working tax deductible categories and how they apply to you
Firstly, to be able to claim back any of your home-working expenses, your home office must be your main place of business. If you generally work away from home and just use the dining-room table to complete the occasional bit of paperwork, that won’t count as far as HMRC is concerned.
There are four categories into which you can be classified in order to qualify for tax deductibles. These are:
Limited Company & Flat Rate - If you are a limited company, then you can claim a flat rate of £6 per week (£4 up to 5th April 2020) against your home-working expenses.
Limited Company & Higher Amount - If you want to claim more than the flat rate under point 1, it’s preferable to have a rental agreement between you and your company to avoid the charges being treated as salary. The rent amount should be market-relevant and because this is particularly difficult to establish, the rental price is often worked out as the share of mortgage interest or rent, council tax, utilities and buildings insurance. Let us say there are six rooms in your house (ignore halls, kitchens and bathrooms) and one is used for the business, then you claim 1/6th of your total costs. It must be considered that HMRC deem it unusual for more than one room to be used for business, but it could be the case if, for example, you’re a photographer with a studio and a separate office in the house.
A Note on repairs - repairs for your ‘home office’ room can be claimed back in full, whilst repairs in other rooms cannot.
Unincorporated & Flat Rate - If you are an unincorporated businesses (for example a sole trader) and you work from home, then there a three scaled categories you can fall into:
- If you work at home 25-50 hours/month, you can claim £10/month,
- If you work 51-100 hours/month, you can claim £18/month,
- If you work 101+ hours/month, you can claim £26/month.
Unincorporated & Higher Amount: An unincorporated business cannot charge rent as such, so no formal agreement between you and your business is needed in this instance to claim home-working tax relief on your rent, or mortgage. You can, however, claim back an amount against tax, calculated in exactly the same way as for a limited company, under point 2.
Important points to be aware of when claiming home-working expenses
The claimable expenses may sound reasonably simple to calculate, but there are some other important factors to take into consideration during your tax return calculations. These are:
Capital gains tax on a property sale: The sale of a residential property isn’t normally subject to capital gains tax (CGT). If you use one room exclusively for business, however, then the proceeds of the sale of that room are potentially liable for CGT. Simplistically speaking, if you have a home office that takes up 10% of the total area of the house, and the house is sold producing a capital gain of £100,000, 10% of that gain would be subject to CGT (£10,000). However, if a spare bedroom with a desk is temporarily used as a workspace while the employer's office is not accessible (or during a Pandemic where Government restrictions are in place), this would not give rise to any capital gains tax issues. It is important therefore, to decide on your ‘work from home’ scenario early on.
Phone and broadband expenses: There are several points here to take into consideration;
- Your home telephone expenses only cover the cost of itemised business calls, not the whole bill.
- Your internet provider costs are not allowable as dual usage (personal and business) unless you have a separate connection for your business.
- Your mobile phone bill is fully allowable (so personal use is ignored) but if you’re claiming as a limited company then the mobile contract MUST be in your company name.
Tax deductibles for staff who work from home
During the Coronavirus Pandemicthe Government extended the above categories to cover staff working from home, which helped SMEs enormously this year at tax time. There are however, a number of other categories of tax relief you can claim for staff who may choose to continue to work from home, or are employed remotely. These are:
Provision of equipment, supplies and services - A company may claim reasonable expenses under ‘assets’, or general expenses, where the provision of certain equipment are made available to work-from-home staff at their address, where the item in question remains under the ownership of the company. Further to this employees are eligible for income tax relief for company purchases on their behalf (https://www.legislation.gov.uk/ukpga/2003/1/section/316). The exemption covers the provision of items such as office furniture, stationery and office or workshop materials and supplies and computer equipment. Telephone lines may also be exempt if there is documented evidence that they have been provided by the business, for business purposes.
Household expenses - the same may be true in terms of business and staff income tax where household expenses meet the requirements under HMRC guidance. This may include general expenses, or utilities, where they are solely used for work carried out for the business.
Talk to us about claiming your home-working tax deductibles
With more and more of us now working from home, it’s important to know what expenses you can claim for, and how much you can claim back against these home-working overheads.
Talk to us and we’ll help you calculate what can (and cannot) be claimed, and what the impact will be on your annual tax bill.
Get in touch to talk through your home-working expenses.