One of the benefits of running your own business is that you can choose who you work for and where you work from. If you use a room in your home as office space for running your business, you may be entitled to claim certain costs as a business expense.
HMRC rules over what you can claim expenses for are complex and are different for limited companies and sole traders.
How much can I claim as an expense when working from home?
If you’re a limited company, then there are two ways of working out your home office expenses – using HMRC’s flat rate amount or creating a rental agreement between you and your limited company.
HMRC flat rate for limited companies
The easiest way to calculate your home office expenses is to use HMRC’s published allowance for the additional costs of running your business from home. You do not need receipts to prove your expenses and you can claim £4 per week, £18 per month or £216 per year. This can be included as an allowable expense alongside anything else you are claiming as long as the annual amount does not exceed £216.
If you run your business through your limited company, you may be able to claim more than £216 each year.
To claim the higher amount, you’ll need to set up a rental agreement between you (as the homeowner) and your limited company. If you do not have this formal agreement in place then you run the risk of HMRC classifying the rent you receive from your limited company as additional salary (from your limited company) which would be subject to Tax and National Insurance.
Drawing up a rental agreement is beneficial because your limited company can deduct rental expenses from your company’s pre-tax profit, meaning that Corporation Tax, will not be payable on the rental expenses.
When you prepare your rental agreement, you need to keep the following in mind:
- The amount of rent needs to be realistic in terms of commercial value and must be at an ‘arm’s length’ basis. This means that neither party should be disadvantaged by the agreement. So you cannot calculate an amount of rent designed to benefit you as the individual owning your home or to affect the profitability of your limited company
- You should have a room dedicated to your business
- A formal rental agreement must be in place and signed on behalf of both parties
- You should consider periodic reviews of the amount of rent paid (for instance an annual review).
Any income you receive as an individual must be included on your personal tax return and any profit remaining after expenses will be subject to income tax at your normal rate, which may make this a less tax efficient option for you personally.
Your rental agreement can be used to cover the proportional costs of the rented space. There is no definitive list of allowable expenses – what is allowable depends on the facts in each case. But you can include items such as mortgage payments, utilities and council tax based on the proportion of the property used for business purposes.
How to calculate your expenses
When it comes to ensuring a reasonable amount of rent, you need to calculate how much space is used by your business. A practical way to do this is to calculate your monthly outgoings for expenses you are looking to claim, then divide that by the percentage of your rooms being used for business purposes (which should usually be one room).
For example, if you have a house with seven rooms, an office should take up one room, so you calculate the amount of rent based on 1/7th of the eligible expenses. If your office was in use on average seven hours a day you would then calculate 7/24th of the amount, and this is what you would include in the agreement as the rent amount.
However, if you decide to sell your property you may need to pay Capital Gains Tax which needs to be included on your Self Assessment. This is because the ‘business’ part of the sale will not qualify for Private Residence Tax Relief. This is due to your home no longer being fully exempt because an area is being used for business purposes. Capital Gains Tax is applied to any increase in the value of the office area that may have resulted from the company’s occupation of it.
This means that you need to think very carefully about whether a rental agreement is the right decision for you. If you decide to sell your house, you could face a Capital Gains Tax bill on the office part as this will not be covered by the Private Residence Relief.
The calculation for this can be complicated and the Capital Gains Tax liability could be reduced if the office is used by you for non-business use outside office hours.
Claiming multiple rooms?
You’ll need to provide a very good reason for using more than one room for business purposes and evidence that the private use of the office is secondary to the business use. A legitimate situation might be a photography studio with an office and a dark room – although you would then have to consider that if you sell the property, Capital Gains Tax may be payable.
If you do use multiple rooms for business purposes then you should apply a rigorous calculation process with supporting evidence. This should follow the process highlighted above. You may even go further and apportion expenses based on the square metres in use.
You may also claim back repairs on your property if they are directly related and necessary for your business.
What if I’m a Sole Trader?
If you’re a sole trader, then the rules are different – you have two choices, you can choose to claim simplified expenses for the self-employed or you can work out your actual costs by calculating the proportion of personal and business use for your home, eg. the proportion of utility bill expenses incurred by your business. Gov.uk has a simplified expenses checker to help you decide which method is best for you.
Simplified expenses for the self-employed mean you claim a flat rate for your allowable expenses based on the number of hours you work from home each month. You’ll need to work a minimum of 25 hours a month from home to qualify. If you use simplified expenses, then don’t forget you can also claim the business proportion of your telephone or internet expenses as these are not included in the flat rate allowance.