Self employed, working from home business expenses

gbgeer43

Hi everyone

I recently took the plunge and went self-employed (freelance IT). Main reason for doing this was so I could take more holiday, I'm loving my new 3-4 day week lifestyle but I'm sure the finances will catch up with me and I'll have to increase my number of clients later on this year.

Anyway, I'm slightly confused about what percentage of home running costs I can claim tax relief on.
I spend 1 or 2 days a week working from home, the other 1-2 days is generally on a site visit (claiming back the travel expense of course, usually train/tube).
Now all the stuff I've read on the HMRC seems to suggest that I can only claim if I have a room dedicated to my working from home.

1) However I live in a 1 bedroom flat with my partner, and generally end up working on the kitchen/dining table. Is it a case of working out a percentage of the total floor area that I use when working from home?

2) Eg: I use 25% of the floor space for work
And there's 672hrs in a month and I spend 80hrs p/m working from home... 11.9% of the total hours in a month
So that means I could claim 11.9% of 25% (so 2.98% of the total) of the bills in #3 below?
Or is my maths totally screwed up?

3) Capital gains tax, don't really want to get stuffed with that!
It's my understanding that capital gains should only apply if I'm claiming tax relief on an asset that I later sell for a profit... eg: mortage payments/council tax and then I sell the flat.
I'm sort of ignoring this as I'm not planning on selling the flat and the capital gains allowance is way bigger than any profit I'd make on it anyway. So actually, does that mean I should claim some of the mortgage/council tax?

4) So if I'm not claiming tax relief on mortgage/council tax, here's what I was planning on claiming a percentage of:
- internet bill
- rent (yep, we pay rent and mortgage... shared ownership)
- water meter
- electricity
- individual phone calls from itemised statement, and a % of line rental
Is that all correct?

5) How about a building service charge? We pay a monthly service charge which keeps the communal areas of the building clean and for the lighting and lift maintainance.

6) To make matters a bit more confusing, I actually attended one of these HMRC workshops on newly self-employed and they said there's a £2-3 per week nominal amount of working from home house-hold expenses you can claim where they won't question it!
Anyone else heard of that before?
Could be an option if I can't be bothered to work out the proper figures.

Sorry about these basic questions, I really just want to make sure I get it right and pay the correct and fair amount of tax for my situation. And I'd rather do it now before the paperwork goes out of control and I lose track!

Any comments/suggestions?

Cheers, B

Chinkle

There is a nominal amount which you can use. If you want to claim more than this, you really need to work out what your home-working costs really are and make sure that are realistic and justifiable. The HMRC website is quite clear and detailed about what you can and can't include, so do take a look.

For example, I think phone line rental and internet are difficult ones to claim unless they are specific business lines, also not sure about water meter - how much water does an IT consultant really need for running his business???

Grade_A_Reject

Chinkle wrote: »

how much water does an IT consultant really need for running his business???

That's funny.

On a serious note I'm in a similar situation to the OP. I woork freelance and spend approx 4 days at client sites, the rest of the week working from home. I work at my dining room table so my calculation was approx 1/5 of my house for 1/5 of the week * my electricity/gas bill.

I wasn't going to bother claiming as 1/25 of my bills with the accompanying justification of how I calculated the costs didn't seem worth the hassle. Do you have a link to anywhere on HMRC that states the "nominal amount" you mentioned?

gbgeer43

Hi everyone
Sorry to dig this up but I've got a couple more questions about this...

1) Does anyone know where in all the myriad of helpsheets the HMRC provide that it mentions the "nominal amount" of £2-£3 per week?
I'd like to see it in writing before I go ahead and start claiming it.

2) I frequently have to pay for stuff on behalf of clients... domain registrations, hosting accounts, hardware purchases etc.
So far I've been adding these up in an expenses sheet, showing it to the client along with an invoice.
Because I'm raising an invoice I guess this counts as income, and I therefore pay tax on it... even though I technically only break even since I pay for it initially then get the money back. It's not profit.
Am I missing out on a tax trick here?
Or is that the best way to deal with things like this?

3) With these expenses that I then bill back to clients, do I have to keep receipts?
Because I raise an invoice like any other invoice and am not claiming any tax relief, I think that maybe I don't need to keep receipts in these particular cases.
Obviously I've been keeping them so far but I'm still trying to get to grips with how best to organise my paperwork.

4) Rent. Is a percentage of rent a legitimate expense?
How about a building service charge?

5) In my original post, is my maths in #2 correct and my understanding of capital gains in #3 correct?

Yeah I did think that I could only claim for dedicated internet/phone lines, which seems strange as by that logic surely I should only be able to claim for heating/electric if I have dedicated mains supplies for business use (crazy example but the principle's the same). I just thought it applied to all utilities, at the moment I'm using no heating and no lighting.

Cheers, B

Elaine_Wilson

1) The £3 per week figure is the amount acceptable for employees without any further proof of the claim. I don't know if it is written anywhere but it is understood that this figure will be not be challenged if used in self employed accounts.

2) If you are charging the client for these amounts then they should be included in your turnover figure but then deducted as a direct cost.

3) Yes, you need to keep the receipts to justify your claim for the deduction from your gross income.

4) The relevant proportion of rent and service charge is a legitimate deduction in your accounts.

5) The maths in number 2 seems very fair. So long as no part of the building is used solely for business purposes then there should be no capital gains consequences. So make sure that any room used for an office also has some private use as well.

I note your comment about internet lines. Does your business absolutely require access to the internet? If so, then I would argue that any private use, regardless of the quantity, is negligible so the whole cost can be claimed as a business expense. I realise this may be controversial but if you are required to use the internet (like for filing VAT returns) Then I believe you can claim for the full cost. Even if you only spend, say, 1 hour a month for business purposes and (let's say) 60 hours private use.

gbgeer43

Thanks for the further info.

So just to clarify your answers for points 2+3
Where you say "direct cost", would that also be termed a "cost of sales"?
It seems to match the description per this page...
http:// www. businesslink.gov.uk/bdotg/action/detail?r.s=sc&r.l1=1073858808&r.lc=en&r.l3=1073863880&r.l2=1073859227&r.i=1073789442&type=RESOURCES&itemId=1073790088&r.t=RESOURCES
(sorry about the non-link, I'm a new user here so not allowed to post links)

So for example, I'm hired by a client to attend an event in the US for setup of technical equipment/tech support/logistics.
I agreed with the client that they would cover the cost of my travel/expenses, so I raise an invoice for them to pay.
Now because I'm raising an invoice and getting paid back, it's not a business expense as such.
But a direct cost/cost of sales... and therefore can be deduced from my taxable profit at the end of the tax year?

Can anything that I re-bill to clients be put down as a direct cost/cost of sales?
- domain name registrations
- internet servers/services
- replacement hardware procurement costs
- travel costs, eg: flights in the above example

So in my master business spreadsheet I currently record the following information:
- a worksheet of sales/invoices
- a worksheet of business expenses that I don't re-bill to clients (stationary, travel costs)
- my class 2 NI payments
Should I also have a worksheet for my direct costs/cost of sales?
Or should they be included in my expenses sheet but marked as a direct cost?

Cheers, B