Not only is there no place like home, but you can also save some tax by working there. So whether you work entirely from home, or just do your invoicing from the kitchen table, you can claim an element for use home as an office in your business expenses.
You get a much better deal than limited companies when it comes to use of home expenses. You can claim a lot more, particularly if you are using the proportion of home method. You can also include the costs of setting up your home office e.g. office furniture etc, under equipment or fixed assets .
Simplified expenses method
This is a nice, easy and straightforward option but you might not save as much as you do using the proportion of home method below. If you work from home an average of 25 hours per month or more, you can use HMRC simplified expenses which gives a simple monthly flat rate. There are three levels depending on how many hours you are working from home. The current maximum rate is £26 per month if you work 101 hours per month or more, which would give £312 per year for your use of home expense.
Proportion of home method
This is a more complicated method because it involves looking back through your yearly bills. However if you mainly work from home and have a reasonable home office space, this can very be worthwhile doing and you only need to work it out once a year.
1. Work out the total for the home office costs. You can do this on a monthly or yearly basis. Costs can include:
Rent / Mortgage interest (just the interest part of your payments, not the capital)
2. Work out what proportion of your home is used as an office. A simple way is to count the number of rooms (not including kitchen, toilets and bathrooms) and then work out the office space as a percentage of this. Example – there are three bedroom and a lounge; the whole of one bedroom is used as the office, so this is 25% of the rooms. You can also do it based on floor area. Multiply your total office costs from step one by your area percentage. If you are using your garage for work you can also include this in the calculation.
3. Work out the proportion of time you spend working from home. Example – if you work at home full-time for five days per week then you can have 5 divided by 7 (equals 71%) as the percentage of the costs. If you work there for just half a day a week then you can have 0.5 divided by 7 (equals 7%) as the percentage of the costs. Multiply your answer from step two by your time percentage to give your final use of home expenses figure.
Don’t get too tied up with working out the percentages for area or time spent. They have to be a fair and reasonable reflection of your circumstances but HMRC is not going to come round with a ruler and a stopwatch. Just do your best estimate.
If you are not sure which of these methods to use, HMRC has a comparison tool to help you decide.
Limited companies are more restricted in what can be claimed for use of home. This is because you, as a director, are considered to be an employee of the company. The only things that an employee can claim from the company are any additional costs that they have incurred. You can not include anything that you would have had to pay anyway because this is considered to be a benefit in kind and would be included on your personal tax return.
Flat rate method
There is a flat rate for limited company employees as well as for sole traders, however it is a bit stingier as there is only one rate no matter how many hours you work at home. The current rate is £4 per week or £18 per month for employees working regularly from home to cover the additional costs of heating and lighting the work area. It is possible to have a different flat rate but it needs to be justified and agreed in advance with HRMC. Again this is the simplest method but the maximum you can claim is currently £208 per year saving £41.60 in Corporation tax.
Proportion of home method
This is similar to the method above for sole traders but you are restricted on what costs you can include. It is only the additional costs incurred that can be counted. Rent, mortgage interest, water rates and council tax can not be included as you would have to pay these anyway. You can only include heat and light in step one, then steps two and three are the same.
Rent a room to your company
It is possible to rent a room in your home to your limited company. This is more complicated as it affects your personal tax as well as the company and is beyond the scope of this article. You can always chat to your accountant to find out more.
What else can I claim?
Use of home flat rates do not include the business proportion of broadband or home phone. You can work these out and add them to your expenses in addition to your use of home. If you are using the proportion of expenses method you can add these in with your office costs total. However, I think it is worth doing these separately as they are not directly related to the amount of space that you use, so the percentage of business use might be different particularly for broadband.
Home contents insurance could also be included if you need to increase your insurance payments to cover it your business use, but you can only have the amount that it increases by, not the total.
Is this money owed to me, can I take it out of the business?
It is owed to you because you are personally paying for some business expenses. The main purpose of the figure is to go into the accounts, to reduce the profit and therefore reduce the tax that you will need to pay. You can reimburse yourself with the money directly out of the bank account if you choose. However, the more common choice is to balance the amount off against other money you have taken out of the company through drawings (sole traders) or the directors account (limited companies).
It is always worth putting something in for use of home if you are making any use of your house at all, even if it is just for admin and invoicing.
If you want to keep it simple or you don’t spend much time there then use the flat rate.
If you work there for most of the time then the proportion of home method can be worth the extra time to work out particularly for self employed.
Don’t forget the business percentage of broadband, home phone and contents insurance in addition.
Photo credit – deathtothestockphoto (modified image)