Working from home office setup

Contents

  1. 1. What expenses can business owners claim for working at home?
  2. 2. Expenses for a sole trader

Can business owners claim expenses for working from home?

August 10, 2021
The last 18 months have seen a huge shift in the working landscape as a result of the coronavirus pandemic. Businesses have had to close – both temporarily and permanently – workers have been forced to self-isolate, and millions more people have been working from home as a result of lockdown. For many people, remote working has become the new normal, but it has not been without its difficulties. As well as getting used to not being surrounded by colleagues, we've had to create our own office spaces and absorb the additional costs that come with working from home.From using additional lighting and heating to running laptops, computers and smartphones, working from home comes with additional costs. This is something that has come into sharp focus in this last year and a half, with many employees claiming working from home allowance.But what if you're self-employed or own your business? One of the benefits of being your own boss is having the flexibility to work where you like. You may have a dedicated office space at home or split your time between working at home and in the office. Did you know there are a number of expenses you are able to claim from your company or to reduce your personal tax bill? In this article, we'll detail what you can claim for and how you can make a claim. 

What expenses can business owners claim for working at home?

What you can claim and the methodology you use to calculate your expenses varies depending on whether you are a sole trader or a limited company director.As the rules are different, we'll break them down into two sections starting with a limited company.

Expenses for a limited company

If you are required to work from home on a regular basis and have a dedicated room or area where you work, there are expenses that you are entitled to claim. It's important to note that if called upon, you will need to demonstrate that you spend a substantial amount of time carrying out work activities. This means that you can't class the dining room as your office because for an hour every couple of months you use the dining table to work out your company accounts. There are two options you have for claiming expenses:

Flat rate method

Essentially, this is the same as an employee being able to claim expenses from their employer for working at home. HMRC allows a company to cover the additional costs of working at home – for example, utility bills such as lighting, heating and power –  which means your own company can pay a fixed amount per week. The current amount for the 2021/22 tax year is £6 per week, which adds up to £312 if you work from home every week of the year.Not only is this a simple method to use, but HMRC also doesn't treat it as a benefit in kind, so you won't have to pay any personal tax or include it on your Self Assessment.However, the obvious drawback with this system is that for many limited companies this amount won't be sufficient to cover all of the household expenses that come as a result of working from home. You also can't claim any expenses that relate to rent or mortgage interest. However, you do have the option to set up a rental agreement with your limited company.

Rental contract with your limited company

In this instance, you are renting your home working space to your limited company, which has the benefit of reducing your company Corporation Tax bill by charging the company rent. It also allows you to claim a higher amount than using the flat rate method, but there are a number of things to consider before making this decision. Keep in mind:
    If the terms of your rental agreement with your landlord or mortgage with your provider permit you to use your home for business premises.You should draw up a formal rental agreement, otherwise HMRC can classify any rental income as additional salary which is subject to PAYE and National Insurance contributions. How much of a dedicated space this part of your home will be for businesses purposes. If you use a space in your home exclusively for work activities, then you could have to pay Capital Gains Tax if you sell your property.The rental income must be declared on your Self Assessment tax return and if the rent is higher than your home working expenses, you will have to declare a taxable rental profit. 

What expenses can I claim?

    Rent/mortgage interestLight, heat and powerWater ratesCouncil taxPhone calls based on your business useRepairs to business equipmentCleaning costs for the room/area in which you work
You may also be able to claim a proportion of the cost of telephone calls and internet costs as long as they are for business purposes. If you want to exclusively claim the whole cost then you will need a dedicated phone line installed and registered in the name of your company, or have a mobile phone contract in the name of your business.As mentioned above, it's important to charge an accurate rental valuation. If your costs are below what you charge as rental income, then you will need to pay tax on the rental profit you receive.

How do I calculate expenses?

The terms of the rental contract need to be for commercial purposes and a realistic rental value must be paid. In order to work out the rental value, you should:
    Work out how much time you spend working on business activities in a given room(s) compared to personal use and divide the two to obtain a %Calculate your expenses based on the monthly costs of the items you will claimDivide this figure by the number of rooms in your home and multiply it by the percentage in Step 1
As an example, let's say that you have 9 rooms in your home and you use one of them as a home office. You use this room for 10 hours each day and 8 of those hours are spent working. That means 80% of your time spent in the room is for business use.The next step is to work out the monthly costs of all of your business expenses (excluding telephone and broadband costs if you don't have a separate business line).For instance, let's say that the cost of your electricity every month is £60.To work out the cost of electricity for the one room that you work in, you need to divide the total by the number of rooms.£60 / 8 rooms = £7.50Now calculate the cost for the one room.£3.75 x 80% (amount of time the office room is used for business) = £6Do this for each of your expenses and add them together to obtain the total expense amount you incur each month for working at home. You will then have a total figure to base your rental agreement on.

What if I work in more than one room?

Usually, most people will only have one room set up for home working, but in some instances, individuals might have more than one. For example, if you are a sound engineer, you might have a room that contains all of your sound equipment, as well as an office where you conduct video calls and online meetings with your clients. To calculate your expenses in this scenario you would need to work out your costs for each room based on the time you spend working in each of them.

Expenses for a sole trader

Sole traders are able to claim for a number of costs when working at home, but the costs must be genuine and be incurred in the process of carrying out business activities. There are two options for claiming working from home expenses. The first option is to use HMRC's simplified expenses method. This pays a flat rate depending on how many hours you work from home each month. In order to make a claim, you must work a minimum of 25 hours in a given month.
Hours of business use per monthFlat rate per month
25-50£10
51-100£18
101+£26
Keep a record of the number of hours you work each month and at the end of the tax year add up the total and declare it on your Self Assessment tax return.For example, if you work from home for 70 hours for 6 months and 40 hours for the other 6 months, you will be able to claim expenses to the sum of £168.The benefit of this method is that you don't have to apportion the cost of your personal and business use for each of your home expenses. However, this rate does not include telephone or internet expenses and is capped at a maximum of £26 a month. If you think your expenses are likely to be higher, or if you need to include other costs, you can use the actual cost method to apportion costs between business and personal use.Using this method you can claim for:
    Mortgage interest (you are unable to claim for capital repayment of a mortgage)RentCouncil TaxHeatingElectricityRepairs to room and office equipmentOffice supplies, such as paper, printer toner and stationeryCleaning costs
The methodology is the same process that we have listed above for working out costs for limited company rental contracts. Firstly you need to calculate the percentage of time spent in a room that is for business use.The next step is to calculate the monthly cost of each expense you are claiming for, divide it by the number of rooms in your house and multiply it by the percentage of business activity.Keep a record of all of your expenses and submit the total amount on your end of year Self Assessment tax return. If you need any help keeping track of your expenses or working out what you are entitled to claim, then have a look at the features Ember offers. For £39 a month, our accounting system is packed full of features and is incredibly simple to use. We also have a team of qualified accountants on hand to help with any questions or tricky subjects you might not understand.
Cam Finney
Cam FinneyHead of CX

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