Over the last year, the work from home revolution has transformed the way many businesses operate.
It's also common for limited company owners to put in extra hours away from the office or to operate primarily from home.
Inevitably, that means some of your work is carried out at your private residence, which might be:
- Bookkeeping
- Preparing correspondence
- Writing reports
- Paying bills
- A home workshop
Whether you're a limited company owner working some of the time remotely, or a business owner with a home office, you can claim against some of your expenses to reduce your tax bill.
In this article, the SAS Accounting team explains the three primary ways to account for these costs and ensure they are claimed correctly in your next tax return.
If you're unsure which option is best suited to your business or need advice to ensure you're claiming all allowable remote-working expenses, please give us a call at your convenience!
Claiming Nominal Expenses for Occasional Remote Work
HMRC allows limited companies to pay their directors or owners nominal expenses to cover general costs for the odd day working from home.
You can check out the HMRC rules online in more detail, but as a brief run-down:
- Expenses are claimable up to £26 per month, or £6 a week. You don't need any approval or authorisation to make these nominal payments.
- Business owners don't need to keep any specific evidence or records of the costs incurred by working from home.
- Bills, receipts or contract paperwork must evidence any claims over and above the nominal allowance.
This general allowance accounts for things like heating and light, where you're covering a slight increase in household expenses during the hours you work from home.
Tax relief is applied on your ordinary income tax rate, so if you claim £6 a week and pay tax in the basic rate band, you'll get £1.20 tax relief each week.
Home Working Expenses Claims for Regular Hours
Suppose you're working from home a proportion of every week or have a home office where you conduct most of your business administration duties.
In that case, the £6 a week tax relief will not get anywhere close to your real-life costs.
Therefore, you can claim against your household expenses but must justify the costs and calculate your outgoings on a verifiable basis.
In short, you need to try and establish how much extra you are spending on household bills due to working from home.
It can be tricky to separate the work and personal proportions of dual-purpose services, such as water, electricity or gas.
Usually, it's worked out like this:
- Divide your property into rooms, split costs for gas, water and electricity between them, and then work out the balance of the cost attributable to running your home office or workshop.
- Calculate the number of hours worked and pro-rata your expenses over time spent working and personal time at home.
You can't claim against fixed costs such as council tax, or mortgage interest, since those values won't change regardless of how much time you spend working from home.
Limited business owners can only claim phone and broadband costs if they are billed in your trading name, or you can demonstrate the actual charges applicable to the company.
Working From Home Rental Contracts
The third option is to create a rental agreement between yourself and your business. This document is a commercial agreement and stipulates a rental value payable for the use of your home space for business purposes.
It can be worth asking a local agent for a rent valuation, so you've got a verifiable way to calculate what the space is worth.
The business can claim tax relief on the rent payments, but you will be liable for income tax on the earnings and need to declare these through the self-assessment process.
Rental income should be split between owners if there is more than one person on the property deeds, according to the ownership share of each individual.
A few tips when it comes to creating a commercial rental agreement for home working premises:
- The agreement needs to be based on evidence of the going rate for the rent charged, and it's worth seeking professional advice to ensure the contract is sufficient.
- You may need permission from your landlord or mortgage lender if you don't own your property outright and want to rent out a room for use by a business.
- Insurers have varying rules around the use of a property, so you'll also need to confirm that working from home in this way doesn't render your insurance cover invalid.
- If the property is deemed to be exclusively used for business purposes, you might forfeit your entitlement to capital Gains Tax exemption if you come to sell.
- There is a minimal risk that you might be charged business rates - although this is very unlikely and only in specific circumstances.
If you think a rental agreement is the best way to account for the costs of working from home, please give the SAS team a call before proceeding so we can walk you through the pros and cons.
The agreement must be perfectly worded, so you don't inadvertently expose yourself to higher tax charges to recoup your extra costs for using your home as a business workspace!
