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Homeworking Costs for the Self-Employed
Over the last ten years technology has advanced massively. It was not so long ago that mobile phones were the size of a brick. Now emails and the internet can be accessed on the move. However, whilst technology has moved on, travelling has become more and more difficult. Homeworking has become the answer for many but how have the tax rules kept up with these changes?
Your status is important
The tax rules differ considerably depending on whether you are self-employed, as a sole trader or partner, or whether you are an employee, even if that is as an employee of your own company. One way or the other though, if you want to maximise the tax position, it is essential to keep good records. If not, HMRC may seek to rectify the tax position several years down the line. This can lead to unexpected bills including several years worth of tax, interest and penalties.
This factsheet focuses on the position of the self-employed.
Wholly and exclusively
The self-employed pay tax on the profits that the business makes or their share of those profits. So, the critical issue is to ensure that costs incurred can be set against that profit. For day to day overheads, those costs generally have to be incurred ‘wholly and exclusively’ for the purposes of the trade to be tax deductible. What does this really mean in practice? Well, HMRC have issued a lot of guidance on the matter which is summarised below.
Use of the home
If the self-employed carry on some of their business from home, then some tax relief may be available. HMRC accept that even if the business is carried on elsewhere, a deduction for part of the household expenses is still acceptable provided that there are times when part of the home is used solely for business purposes. To quote:
‘If there is only minor use, for example writing up the business records at home, you may accept a reasonable estimate without detailed enquiry.’
So that there is no confusion, wholly and exclusively does not mean that business expenditure has to be separately billed or that part of the home must be permanently used for business purposes. However, it does mean that when part of the home is being used for the business then that is the sole use for that part at that time.
HMRC accept that costs can be apportioned but on what basis? Well, if a small amount is being claimed then HMRC will usually not be too interested. In fact, HMRC seem to accept that an estimate of £2 or £3 per week is acceptable with no great record keeping or other requirements. However, if more is to be claimed then HMRC suggest that the following factors are considered:
- the proportion in terms of area of the home that is used for business purposes
- how much is consumed where there is a metered or measurable supply such as electricity, gas or water and
- how long it is used for business purposes.
What sort of costs can I claim for?
Generally, HMRC will accept a reasonable proportion of costs such as council tax, mortgage interest, insurance, water rates, general repairs and rent, as well as cleaning, heat and light and metered water.
Other allowable costs may include the cost of business calls on the home telephone and a proportion of the line rental, in addition to expenditure on internet connections to the extent that the connection is used for business purposes.
So how does this work in practice?
As already mentioned, if there is a small amount of work done at home, a nominal weekly figure is usually fine but for substantial claims a more scientific method may be needed.
Andrew works from home and has no other business premises. He uses a spare room from 9am to 1pm and then from 2pm until 6pm. The rest of the time it is used by the family. The room represents about 10% of the total area of the house.
The costs including cleaning, insurance, council tax and mortgage interest are about £8,000. 10% = £800 and 8/24 of the use by time is for business, so the claim could be £267.
Electricity costs total £1,500, so 10% is £150 of which 8/24 = £50.
In addition, a reasonable proportion of other costs such as telephone and broadband costs would be acceptable.
The key to Andrew’s claim will be that he keeps the records to prove the figures and proportions used.
For self-employed businesses, the depreciation of assets is covered by a set of tax reliefs known as capital allowances. For equipment at home, such as a laptop, desk, chair, etc, capital allowances may be available on the business proportion (based on estimated business usage) of those assets. So, if Andrew uses his laptop solely for business, the whole cost will be within the capital allowances rules.
What about travel costs?
Another consequence of working from home is the potential impact on travel costs. The cost of travelling from home to the place of business or operations is generally disallowed, as it represents the personal choice of where to live. The fact that the individual may sometimes work at home is irrelevant.
Where an individual conducts office work for their trade does not by itself determine their place of business, so although many may be able to claim tax relief for the costs of working from home, far fewer will be able to claim travel costs of going to and from their home office.
Of course, this principle presupposes that there is a business or operational ‘base’ elsewhere from which the trade is run. Normally, the cost of travel between the business base and other places where work is carried on will be an allowable expense, while the cost of travel between the taxpayer’s home and the business base will not be allowable.
However, where there are no separate business premises away from the home, travel costs to visit clients should be fully allowable. The crux of the matter is where the business is really run from.
Capital gains tax contains a tax exemption for the sale of an individual’s private home, known as principal private residence relief (PPR). Where part of the dwelling is used exclusively for business purposes, PPR relief will not apply to the business proportion of the gain. However, HMRC make clear in their guidance that ‘occasional and very minor’ business use is ignored.
As you can see, all things are possible but the key is to be clear about the rules, keep good records and be sensible about how much to claim.
A recent development - a simpler tax system for smaller businesses
Draft legislation has been issued on:
- an optional cash basis for computing profits where an unincorporated business has a turnover up to £77,000
- a range of expenses that many unincorporated businesses will be able to claim on a flat rate basis rather than having to identify actual amounts spent.
The cash basis will be implemented for the tax year 2013/14. A business will be able to continue to use the cash basis until its turnover reaches £154,000.
Provided certain conditions are satisfied, the following monthly flat rate expenses will be allowed in respect of home working costs as an alternative to claiming specific costs of the home:
|Business use of home in a month
|25 hours or more
|51 hours or more
|101 hours or more
Flat rate expenses will also be available for: cars, vans and motorcycles. For cars or vans the rate for the first 10,000 business miles is 45p, after which the rate reduces to 25p. For motorcycles the rate is 24p.
If the cash basis is adopted, the flat rate expense system for transport must be used. The flat rate system will be optional for other unincorporated businesses
Please contact us if you would be interested in using this simpler system which is still in the consultation phase as there are many issues to be considered.
How we can help
If you would like any help about obtaining tax relief on the costs of homeworking, please contact us.
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For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.