We have covered tax deductible expenses on our blog before but seeing as we are now under government instruction to work from home, it is possible things have changed. We have brought in Eoin Holohan, a chartered accountant from London accountants, MJH Accountancy to give more clarity about tax deductible expenses when working from home.
If you were previously working on a client’s site, you should now have substantially less expense to offset your tax liability as you will no longer be claiming for travel and subsistence. However, your business will incur costs of a different nature in this period as it is likely you will see your utility and phone bills increase. This post will guide you through the home office expenses you are allowed to claim for.
For the purposes of this post, ‘home office expenses’ are taken to include heating and electric bills, rent or mortgage payments, council tax and other utility bills. The treatment of telephone, internet and other consumables and purchases is slightly different. Tax treatment of home office expenses is different for self-employed and limited company contractors so we will look at each separately.
You can claim any expenses incurred wholly and exclusively for business purposes so for example if you need to buy home office furniture this can be used to offset the company’s tax liability. If you work through a limited company, it is advisable phone and internet bills should be in the company’s name, however business phones and internet usage can be charged to the company without incurring BIK. If the bills are in your own name or you are self-employed you need to calculate the portion of usage that is business related.
From 6 April 2020, your limited company can pay you up to £6 per week to cover additional working from home costs (£4 per week in 2019/20 tax year). You do not need to keep receipts for this so it is easy to operate, however it is likely you will incur working from home expenses far in excess of this.
If you feel this does not adequately reflect the value of home office expenses you incur on the company’s behalf, it is advisable to draw up a rental agreement between the limited company and yourself. Rent should be priced at arm’s length basis and can include an allowance for other rental expenses such as light and heat and council tax. The case is the same for both tenants and homeowners, however it may impact Capital Gains Tax for homeowners.
One downside for homeowners, is that renting a room in your house can open you up to paying capital gains tax when you sell the house. Principal Private Residence Relief exempts you from paying tax on gains on your primary residence, however the relief does not apply to any part of your home used exclusively for businesses purposes.
Capital gains can attract a tax of up to 28% on the increase in value of your property so we recommend obtaining professional advice if you think charging the limited company for home office space used will be worthwhile.
For self-employed workers it is slightly easier to claim home office expenses, by either of the following methods:
1. HRMC details flat rate amounts that you can use to claim expenses for working from home. These include an allowance for heat and electric, council tax and mortgage interest or rent but do not include phone and internet charges. The advantage of using the flat rate is that you don’t need to calculate the personal and business use of your home, however the rates are very low.
2. Work out the actual business expenses incurred as result of working from home and keep a record of these. There is a worked example of how to make the calculation below.
If you are not using flat rates, charges should be based on the portion of your house used as an office and pro rata the home office expenses against this. For example, if your home has 4 rooms and you are currently using 1 room as a home office 5 days a week, you should be able to claim 18% (25%*5/7) of your home office expenses.
You may be able to argue that you use a higher proportion of electricity when working from home. Another way of looking it would be the increase in your bills since the COVID-19 lockdown when you began working from home. If you deviate from the above formula make sure you would be comfortable standing over it if you ever did need to explain it to HMRC. If you would like more information on this calculation see the HMRC calculator.
As mentioned above, homeowners may incur capital gains tax exposure when charging home office expenses against business profits. As PPR rules disqualify any part of your home that is used exclusively for business purposes, you will need to argue that whilst you worked in the house, no part was exclusively used for business purposes. This is an easier case to make if you are self-employed as opposed to contracting through a limited company.
We hope this helps contractor and freelance workers to understand what you can do to minimise your tax bill given the recent changes to your working arrangements. I appreciate that some elements may be complicated so please get in touch with MJH Accountancy if you have any queries.
This information is intended as a guide, not as financial advice. IPSE is not a financial advice service. For specific advice, please speak to your accountant.
