From understanding expenses to starting a limited company, our downloadable business guides can help you.
Sometimes it feels almost as if HMRC purposefully use language open to interpretation just to create potholes for freelancers, contractors and small businesses to fall into. Some of their favourite ambiguities (such as ‘fair and reasonable’, or whether something is ‘modest’ or ‘excessive’) fall short of giving taxpayers enough solid information to know where they legally stand.
Your average high-flying executive will likely have a different take on what constitutes a ‘fair and reasonable’ office expense to the great unwashed, and HMRC demands proof for any claims over and above a paltry £4 per week.
If you’re claiming for anything over £4 (this is classed as a ‘significant’ expense by HMRC), you will have to make sure you can provide records for the expense, or demonstrate your calculations or you could be faced with the prospect of a tax investigation.
This is a particularly perilous area, as HMRC are known to penalise companies for careless behaviour with expenses, and can launch backdated investigations if they suspect further miscalculations.
Expenditure as an employee of your limited company is different to if you were a sole trader, because you are employed by your company to work in an area which is owned personally. In order to claim over the £4 prescribed limit you need to set up a contractual rental agreement with your limited company, which then leases the office from you as an individual.
Business expenses contribute to reducing your profits, which in turn reduces your Corporation Tax, so by leasing your property to the company you can effectively kill two birds with one stone. Your rental costs can be used to cover the proportional costs of the rented space (e.g. mortgage payments, council tax, home insurance and utilities), which will result in a bigger reduction on your Corporation Tax return.
However, if you then decide to sell your property you may encounter Capital Gains Tax which you pay personally on your Self Assessment. This is due to your home no longer being exempt because an area is being exclusively used for business. Capital Gains Tax is applied to any personal increase in value of the office that may have resulted from the company’s occupation.
Do not despair, there’s a nifty exemption; any area in your house which has been used as part of the ‘main family residence’ is exempt. Essentially, this means that any home office which you can demonstrate also doubles up for personal use will not attract Capital Gains. Many freelancers and contractors choose to also use their home offices as guest bedrooms, or you could even throw in an exercise bike and say it’s your gym!
When you draw up the contract between your limited company and the homeowner make sure you confirm that the room is not exclusively for business use – you could even take some pictures to back this up.
When it comes to ensuring a reasonable claim, you need to calculate how much space is specifically used for your company’s work. A practical way to do this is to calculate your monthly outgoings for gas, electricity, rent etc., then divide that by the percentage of your rooms being used for business (which should usually just be one, an office!).
For example if you have a house with 7 rooms, an office should take up one, so you apply your working business expense to 1/7th of the home’s maintenance costs.
If the expenses seems substantial then it’s a good idea to safeguard yourself and apply an additional calculation, just so you can fight your corner if HMRC turn up on your doorstep. A good way to do this is to take your apportioned expenses and divide that by the hours it is spent in use.
If your office was in use on average nine hours a day you would then calculate 9/24th of the amount, and this is what you would claim.
HMRC are a cynical bunch and are likely to raise one, or several, eyebrows if your claim includes multiple rooms or additional expenses. You will need to supply a very good reason to justify more than one room, and subsequently need to ensure that the private use of a room is secondary to the necessary business use.
An honest and legitimate claim might be, for example, a photography studio with an office and a dark room – although you would then have to consider that the studio may encounter Capital Gains Tax as it would be exclusively for business use.
If you do use multiple rooms for business use then you should apply a more rigorous calculation process and make sure HMRC haven’t got any grounds for further investigations.
Employ the same procedure as you would for a single office, calculate the cost of your total maintenance then divide it by the rooms in use – or for even more precision apportion the costs based on the square metres in use. Divide this amount by the number of hours these rooms are in use during the day, as above. Finally divide this amount by the number of days worked in your average week. For example, if you work a regular working week you would calculate 5/7ths.
One last thing that’s often forgotten – you may also claim back repairs on your property if they are directly related and necessary to your business.
Getting out of the office might be the best decision you ever make. Here are a few things to consider when deciding whether working from home is for you.
As it stands, some home businesses may be liable for business rates, which can mean a property owner must pay this on top of their council tax.