Use of home as office allowance

Introduction

As a UK contractor or small business owner, you may work at home from time to time. You will do this as part of running your own UK company or sole trader business. It may also be the case that you find yourself working from home on a more regular basis.

When you do perform work at home, you will incur various office expenses. As a result of these costs:

  • What can you claim in respect of use of home as office?
  • How will we work this out?
  • Can the cost of this be counted as a business expense so that your business can claim tax relief? 

When you make a claim for your home running costs, there is a term that is used by HM Revenue & Customs (HMRC). This is called use of home as office. Therefore, how can we work this out and when we claim for this cost will it be tax-deductible?

If you are a limited company owner, you will be able to make the claim through your business. On the other hand, if you are self-employed you can claim through your tax return. You may also be employed and if your employer does not refund you for working from home, you can also make a claim through your tax return.

When you claim for use of home as office and indeed any associated home costs, as a business you will save:

  • Corporation Tax, if you run a limited company.
  • Basic Rate tax or Higher Rate tax and National Insurance, if you are self-employed.

Initial considerations

Dealing with administration

Many businesses across the UK, operate from home. As a result of this, at least all or most of the administration will be dealt with there. As part of this, a business owner will need to know:

When business related activities are being carried out when working from home, it is also good to know how to go about creating an office at home.

It is also worth a note, in a minority of cases, that far more of the business activity than merely the administration side of things is done from home.

Setting up your home office

When you are dealing with business administration and other tasks you will need to use certain equipment to do this. Therefore, you may have a business computer and associated equipment to be able to carry out most of your work on.

When you think about creating your home office, it is best to have a separate room. That is, it is best to keep work related areas separate to personal ones. Therefore, once you decide where your working space will be, let’s think about what you can claim as business expenses.

The cost of furnishing a dedicated office at home will include:

  • Carpets.
  • Curtains.
  • Flooring.
  • Desks.
  • Filing cabinets.

What’s more, you can claim for a business computer and other relevant electronic equipment through your business. If you have a landline for business reasons, you can also claim for the cosy of this, if it is a dedicated business phone line.

On your business computer, besides using this to maintain your accounting records, you may also use this to:

  • Write official company letters on.

Please have a read our article covering tax tips for contractors. This includes lots of handy tips and advice that you should know when you have your own business.

What to consider   

Is it fair to make a claim for home office use when you work from home?

We think, on balance, it only seems fair that the business owner should be able to make some form of a claim for using their home as an office. The claim should be from the expenses that you incur. These expenses will be incurred when you run a home office that you use in part for such purposes.

The best option is to avoid a tax cost for you as the business proprietor / homeowner when you make a claim. Indeed, for you to do so, you mustn’t be making a profit in this. It is also vital that you do not describe the payment as rent. If the business pays you rent, then this will be taxable income for you as an individual.

Therefore, you will need to find a way how you can work out the amount of any payment for the use of your home as an office. There are some costs which stay the same, such as Council Tax. If you are working from home, you should not take these into account.

Other expenses which you should not take into account will include:

  • The cost of buying the home (this includes the mortgage payments).
  • Rent.
  • Most insurances.
  • Possibly water rates.

But you do work from home sometimes…

When you buy your home, it would be ideal if there is a certain feature, such as a separate room to work from. You could use this room just for business use. This room would be beyond the number that the household ordinarily requires. If this is so, you can justify a claim for the extra running costs that you incur whilst working in this room. When there is no separate office, it is not as easy to work out your home office running costs.

Expenses that you can claim for will tend to comprise of utility bills. These will mainly include:

  • Heating.
  • Lighting.
  • Power supplies.
  • Some cleaning costs might be ok too.
  • Insurance might also be ok too if the cover includes equipment that you use in the business. Such equipment will include computers and other electronic devices.

Many think they may be able to claim proportion of their rent or mortgage or even part of the mortgage interest. However, these costs are not allowed as mentioned earlier. This is because you would incur these costs whether you worked from home or not.

History and use of home as office -HMRC guidance

Prior to 2005 

Before the end of 2005, there was no benchmark for someone who used their home as an office. Neither the Inland Revenue (now HMRC) nor accountants had any guidance as to what proportion or absolute amounts of running expenses they could regard as acceptable. Separate meters would be required to measure the amount of energy that a business used in the activities at home.

Cynically, we suppose, claims were made as high as the claimants dared. Perhaps in the hope that HMRC would not challenge their claims at all. Or if they were challenged, they could be justified.

HMRC guidance

In early 2006, HMRC issued a bulletin about home office use. We paraphrase, “in recognition of the increasing occurrence of people carrying out their work from their homes, HMRC will not seek to challenge a claim towards home running expenses up to £3 per week”. This is a flat rate amount that one can claim.

Subsequently, the amount was then increased to £4 per week and this stayed in place for many years up to March 2020. The amount then increased to £6 per week from 6 April 2020, just after the start of the pandemic.  Therefore, the amount that you can claim for use of home as office allowance 2021/22 and 2022/23 is £6 per week.

But today, if you like it or not, HMRC has its benchmark.

A justification exercise 

A claim for home office use at an amount higher than the benchmark will need to have some scientific justification. It will also need some evidence to support this:

  • As a starting point, you could tally up the costs for some time before the business use at home started. You can then compare these with costs for a similar period after the business has commenced. As a result, will this then be evidence?
  • On the other hand, you can take a tally of the appropriate expenses for a period of time. You can then divide the cost by the number of rooms in the home (one being the room that you use for the business). You can then adjust the amount, up or down, as required. The claim will also depend on the amount of time that you spend in the dedicated office room. You can then compare this with the time that you spend in the rest of the house.

What’s more, perhaps you can take some energy that the office equipment consumes. Indeed, a justification exercise may not be easy to put together, and contentions may be difficult to defend. The amount of extra tax that you save might not make a claim cost-effective. This will be the case if you will incur professional fees in any detailed breakdown or later defence of the claim.

Simplified expenses -if you are self-employed

You can use the simplified expenses option if you are:

  • Self-employed; and
  • Work for 25 hours or more a month from home.

You can make claims for the rates in the table below for how many hours you work at home each month. Please note, these rates are for self-employed people rather than directors of limited companies.

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

Using your home broadband / phone for business reasons while working from home

Whilst you are working from home, you will more than likely be using the internet. What’s more, you may receive business calls while you are working or may need to make them yourself. Therefore, you will, in most cases, also be able to make claims for your business phone calls and broadband usage.

Advisory rate -HMRC’s rate when working from home

Unless a business owner has strong feelings to the contrary and wish to justify a higher claim for working from home, then we believe claims henceforth should be only the pre-agreed £6 per week.

If you think you can justify a higher amount than the £6 per week e.g., in scenario where you use your home exclusively for work or work from home most of the time, you should prepare yourself to perform a justification exercise. This is as we describe above.

If you claim for an amount for using your home for business reasons and HMRC deem this excessive, the payment will be subject to National Insurance for the employer and Income Tax for the employee.

Renting a separate office

If you rent a separate office or work unit away from your home, you can claim for the expenses that relate to this:

  • Rent.
  • Business rates.
  • Utility costs.
  • Phone and broadband costs.

As is the case with any business expenses, you should try and make sure that any contracts and bills are in your company’s name, rather than your personal name.

Final thoughts

To sum up, as time goes on, more and more business-type people work from home. If you would like to work out how much it costs you to do this, you will need to make a comparison. When you calculate this, you will look at what the overall costs are now. You can then compare these against what your costs were previously, to work out your claim. As a result of claiming for using your home as office, either as a company or self-employed person, you will receive tax relief.

In most cases, contractors and small business owners will stick to the allowable fixed rate of £6 per week when they use their home for business purposes. That is unless they spend much more than the occasional time working from home. Examples here could include where you work several days per week from home. It could also include if you run various computers at home at the same time.

Finally, if you have not been claiming for use of home as an office you can claim for this now. In addition, you could also make claim for previous recent tax years.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: March 5th, 2021 / Categories: Expenses, Expenses Guides, First timer guide /

Share This Story, Choose Your Platform!

Leave A Comment