Work at home: what home costs can I charge against tax?

Seaxwyn

Hi there

I'm self employed and work mostly from home. Can anyone recommend a good source of advice on what types and proportion of my home costs (electricity etc) I can claim against tax. I've called TaxAid and also spoken to an accountant and they gave me contradictory advice.

Thanks

Bean_Counter

Here's a few examples that I have 'borrowed':

MAXIMISING A WORKING FROM HOME CLAIM
WORKED EXAMPLES




If there is only minor use, e.g. writing up the business records at home, you may accept a reasonable estimate without detailed enquiry. The following examples are a guide only and intended to demonstrate the principles to be applied; each case will be dependant on the facts (http://www.hmrc.gov.uk/manuals/bimmanual/BIM47825.htm).
Example 1. Angela writes up her business records at home. She uses a room solely for business purposes for a short period each week. She estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.
Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.
Example 2. Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade. The room represents 5% of the floor area of the house. His Council Tax, insurance and mortgage interest bills total £4,500. He claims 5%; £225. His electricity bill for heating and lighting is £300. He claims £15, which is 5% of the total. His total claim is £240 (plus the business proportion of his phone bill). Although Bill has apportioned his electricity bill by floor area rather than usage, the amount claimed is small and there is nothing to suggest that his business use is significantly greater or lesser than his private use. It can be accepted as a reasonable estimate.
Example 3. Bert runs a small business. He uses the spare bedroom at home as his office except for a week at Easter and a week at Christmas. All he does is write up his records, once a week. The house has ten rooms. Bert calculates that his business expense, based on 1/10 of the total costs would be £450. Bert recognises that this is far too much for what he actually does at home. Bert estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting. Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.
Example 4. Chris is an author working from home. She uses her living room from 8am to 12pm. During the evening, from 6pm until 10pm, it is used by her family. The room used represents 10% of the area of the house. The fixed costs including cleaning, insurance, Council Tax and mortgage interest, etc. total £6,600. A tenth of the fixed establishment costs is £660. For the purposes of fixed costs, one sixth (4/24) of the use by time is for business, so Chris claims £110. She uses electricity for heating, lighting and to power her computer, which costs £1,500 per annum. Chris considers an apportionment of these costs by time and area. A tenth of the costs is £150 and half of these costs by time (4/8) relate to business use, she claims £75. She also uses the telephone to connect to the Internet for research purposes. Her itemised telephone bill shows that a third of the calls made are business calls. She can claim the cost of those calls plus a third of the standing charge.
Example 5. The facts are as in example 4. Chris has some work done on the house. She has the exterior painted and at the same time has the dining room redecorated. What, if anything, can she claim as a deduction? The exterior painting is a general household cost. She can claim a proportion based on business use. Chris does not use her dining room for business purposes. The cost of redecorating the dining room is not an allowable expense.
Example 6. Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of four hours each day, though often this is spread over his working eight hour day as he has a number of regular site visits to make. In addition, it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours. The room is available for domestic use outside of business hours and his family regularly make use of the room for around two hours each evening.
After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electricity and oil) and £600 of fixed costs (Council Tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480). The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.
Example 7. Bill entertains a number of customers at his home. Each time he hires caterers and also a firm of cleaners. Although Bill has used his home for business purposes, he cannot claim any of the costs as there is legislation that disallows entertaining costs.

Seaxwyn

Thanks Bean Counter!

Example 4 sounds a lot like me so I will work something out based on that formula.

Are there any downsides to claiming such costs though? eg a friend who runs a business from home told me that if you do so your house becomes liable to Capital Gains Tax if you sell it - is this correct? And if so, is it the whole value of the house that is subject to CGT or just the proportion you claim for (half of 5% or whatever)?

Thanks again

Bean_Counter

I'll have a wee look in the tax books when I get to work in the morning (yes some people have to work on Good Friday!)

I'll let you know then.

LifeisEvenbetter

Thanks for this Bean Counter. My hubbie is looking at becoming self employed when he graduates this summer so this will give him a good starting point when thinking about using any part of our home for his business.

bunnygirl_3

Hmm, another accountant working on Good Friday! Must be something about the job.

HMR&C have recently relaxed the rules on Use of Home as Office claims, so you're more likely to be allowed a reasonable proportion of the costs attributable to that room than in previous years.

Basic advice is to calculate the costs attributable to that room (not including any capital element of mortgage payments) and apply a percentage based on the amount of time that the room is in use for business purposes.

Bean_Counter

Hi Bunnygirl,

I work in the construction industry, so holidays are pretty much picked for you, weel they are in Scotland anyway.

(I do have all of next week off though.)

Bean_Counter

Good morning. Got the tax books in front of me now. Capital gains tax is not my field of expertise by any stretch, so pleeeeeeeeeease don't do anything rash just on the basis of this.

In principle, the proportion of your house that you use for business would be liable to CGT. However, this would also be the gain on that part, not just the selling price. In addition, there are various reliefs etc that would reduce the taxable gain, concievably down to less than your annual CGT allowance.

However, I believe that no taxable gain would arise if no part of the home was used EXCLUSIVELY for business purposes. As you said that example 4 was closest to your circumstances, you are using the room sometimes for business and sometimes for pleasure. Hence there is no exclusive business use and I don't think a gain would arise. Hopefully another poster could confirm this.

Going back to what bunnygirl said, as long as you have a reasonable argument for the costs that you are claiming against the business, HMRC will more than likely accept this.

WHA

Can I just point out that the "relaxation" of the rules and the general rules outlined above are only for "self employed", i.e sole traders and partnerships. They do not refer to employees or directors of their own limited company who are not "self employed" for these rules and who continue to have a much greater restriction of their use of home allowance and certainly don't have the ability to claim for rent/mortgage interest or any allowances towards fixed costs, but merely the "extra" cost of working from home, such as more electricity, more metered water rates, etc. It is important to recognise the widely different rules between being a sole trader and director of your own limited company.

Seaxwyn

Thanks guys.

Bean counter, I really appreciate your looking into that for me. Im definitely going to claim this, it won't be very much but every little helps. I know I've been paying too much tax for years.

Thanks WHA I'm just a sole trader. Well done on the weight loss!

pullena

Hi,

New to this thing although was really good to find the thread on Google. Just started a business as a limited company, using home as a base. Bit disappointed that I cannot charge part of my mortgage interest though. Anyone know what I can do in terms of allowable expenses?

AP