Sole Trader working from home. What can I claim for expenses?

Dee_Castle

Hi! I'm a freelance web developer who works on average 35hrs a week from home. I am a sole trader, like alone and fill out my tax self-assessment forms every year. I'm a little confused about how much I can claim as legitimate work expenses so I was hoping somebody could give me some advice.

I rent a studio flat (one main room, seperate kitchen and bathroom) for £500/month. About 1/4 of my front room is used for work, it has my desk with a PC on it.

I also pay £35/month for phone/mobile/broadband and I'd say these are used 50/50 with work and play.

My water/gas/electric costs are around £80/month.

I have a business bank account where all my normal business expenses end up (i.e. a new chair etc..) so I can calculate them quite easily. But how much should I be claiming for the household expenses listed above? Can I legitimately put 1/4 of my rent or half my gas bill on expenses?

I currently take £25/month out of my business to cover these costs but people have said it should be over £100. Obviously I want to do everything by the rules, so what is your advice?

Thanks in advance!

HappyMJ

It's not my advice but advice I've been given. You can only claim the additional costs of working from home. i.e the fridge is on 24 hours and it would have been anyway whether you were home or not so you can't just claim a quarter as you propose. The HMRC says £3 per week for heating and lighting is ok without any proof of how you figured it out.

The phone line you would have had anyway whether you had a business or not so you can only claim the costs of the additional phone calls made on the line. The broadband is the same you would of had it anyway so can't share it's costs with the business.

The 1/4 of the rent must be 1/4 of the floor space of the whole flat combined including the kitchen and the bathroom but as you have a studio flat it's going to be harder to justify why you needed extra space for the business over and above what you would have rented anyway. It's normally for when you rent a 2 bedroom and set one room aside solely for the use of the business. You may be able to I'm not sure. If that part of the room set aside is also used by yourself on the weekend then you will need to make an adjustment to the percentages as well.

PlutoinCapricorn

It is not a question of amounts, it is more a case of percentages.

Some people count the rooms, ignoring kitchen and bathroom, and decide what percentage of the remaining rooms is used for work, and claim that much as expenses. If you have one main room, then 25% seems reasonable provided that you could justify this to HMRC if you ever needed to.

Council Tax, Service Charges, Water, Gas, Electricity are all running costs: I am not sure about rent but mortgage interest is a legitimate expense.

Phone bills, internet need to have an estimate of the percentage for work and personal use.

HappyMJ

I know for sure that a business cannot claim residential council tax but it can claim 100% of the business rates that apply to the property. If you would like to declare that to the VOA it may reduce your council tax banding and in a perverse way it may save you money.

PlutoinCapricorn

The £3 per week applies to employees on PAYE who are required to work from home, not sole traders.

If people turn part of their property into a clinic or workshop then business rates might well apply, but someone who just sits at their PC in a part of their room and doesn't have a stream of customers is not affected by this. There is a lot of confusion about all this:

http://business.timesonline.co.uk/tol/business/entrepreneur/article3107456.ece

Insurance may also be claimable.

HappyMJ

PlutoinCapricorn wrote: »

The £3 per week applies to employees on PAYE who are required to work from home, not sole traders.

If people turn part of their property into a clinic or workshop then business rates might well apply, but someone who just sits at their PC in a part of their room and doesn't have a stream of customers is not affected by this. There is a lot of confusion about all this:

http://business.timesonline.co.uk/tol/business/entrepreneur/article3107456.ece

Insurance may also be claimable.

Ok so lets figure it out £80 is £18.46p/w he can claim 25% of that on his calculation so thats £4.61 then he's only using it for 5 out of 7 days so thats £3.30. Then on the days he is using the room he is also using it for personal reasons so half it again so £1.65per week. I'd rather claim the £3.

fengirl_2

Self employed people cannot CLAIM anything. But all their expenses must be included in thier accounts and this reduces the tax due.
HMRC will always allow what is reasonable and its up to the taxpayer to show what is reasonable - no Inspector is going to demand adjustments for minor amounts for use of home - keep it in perspective.

Pennywise

HappyMJ wrote: »

I know for sure that a business cannot claim residential council tax

Council tax CAN be claimed as per the HMRC manual:

http://www.hmrc.gov.uk/manuals/bimmanual/BIM46840.htm

I can never really understand why there is such confusion about what can and can't be claimed for use of home for business purposes. In my opinion, HMRC's business income manual re use of home is one of their best for its clarity and understandability which is certainly not the case for 99% of other aspects of business taxation. Have a read through their business income manual and you'll probably be surprised at how much they'll allow you in the way of tax deductable expenses.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47800.htm

HMRC's manual is also excellent for how to apportion:-

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47815.htm

Here is HMRC's view on all the different types of household expenses that can be claimed, what can't and their reasoning behind it:-

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47820.htm

Finally some examples from HMRC's business income manual:-

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47825.htm

Dee_Castle

This discussion and all your help has been invaluable to me, and hopefully others in my situation.

Please continue to add to the advice if there's anything else you think I should know.

sunflowergirl

Thank you pennywise, I have never claimed part of my morgage interest before and I have been working from home for a couple of years! I will this year so thanks again

PlutoinCapricorn

It is always best to go to the source for the rules: HMRC as in Pennywise's posting. Businesslink is useful too. Googling can highlight wesbites such as tax accountants' that give similar information.

What you do get on MSE is a variety of opinions, confirmation and explanation of the rules and the principles behind them, personal examples of different types of businesses and claims and some information that can be misleading!

People do often put the £3 per week forward as an option, not realising that it applies to employees only not Sole Traders, and only employees whose contract of employment states that their main work address is their residential address.

People also often mention CGT and business rates, not realising that there is a big difference between, for example, a freelance writer who is based at home and someone who converts part of their home for business use only. For example, a dentist who turns his downstairs rooms into a waiting room, treatment room and stock room or someone who sets up a photographic studio might well be of interest to the Council as the property is no longer residential use only. Anyone who works from a home that is still entirely a home need not worry about business rates and CGT I think.

Calculating the percentages to claim is another area where there is confusion. The principle is simple: you need to claim a realistic proportion of the running costs. Anyone with a big house with many rooms who claims 25% is probably claiming too much, but this is reasonable for a studio flat. No one is expected to count the kilowatts and minutes, you must make a realistic estimate, and be prepared to justify it if investigated by HMRC. The whole point of working from home is that you are not restricted to office hours and can blend work with domestic life. A Sole Trader whose business takes them out of the house for most of their time would be expected to claim a lower percentage.

There is a box in the self assessment form where you can explain what your estimates are based on.