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If you use a room in your home as office space for running your business, then there are two ways of claiming home office expenses one of which is relatively straight forward, and the other of which is more complicated.
The simple option – The flat rate claim
This is the easiest way to claim for your home as office expenditure and is based on HMRC’s own allowances for the additional costs of doing business from your home. You do not need receipts to prove your expenditure and you can claim £4 per week, £18 per month or £216 per year. This can be included as an expense alongside anything else you are claiming, so long as your annual claim does not exceed the £216 limit.
The complicated option – The rental agreement
If you are operating through a limited company then you may be able to claim for more than the £216 limit allowed under the flat rate system. In order to claim a higher sum, you will need to set up a rental agreement between your company and yourself as an individual. If you do not have this formal agreement set up then you run the risk of HMRC classifying the rent as an additional salary which would be subject to income tax and National Insurance contributions.
Organising your home office in this way can be beneficial as your company can deduct the cost of rental payments from their pre-tax profits, meaning that Corporation Tax would not be payable on those amounts. However, you need to consider the following consequences of going down that route
- Your rental figures should be realistic in terms of commercial value, and should be kept at an arm’s length basis, meaning that both parties should benefit from the arrangement
- You should have a room dedicated to your business
- A formal rental agreement must be in place
- It is worth considering periodic independent rental evaluations
- Any rental income that you receive must be included on your personal income tax return and any profit remaining after expenses have been deducted will be subject to tax, which might make it a less tax efficient option than it would otherwise appear
- Any rental agreement could affect your Principal Private Resident’s Relief (“PPR”) if you sell your property for a gain (see below)
You need to get an idea of the going rental rate for offices in your area by searching for serviced offices to see what rates they charge. Rates are usually based on the square footage available and additional charges for things such as insurance and rates and this will help you to set an appropriate rental amount.
Principal Private Residence Relief
If you sell your home, any gain in its value over its original cost may be taxed under the capital gains tax rules. However, if your home is your main place of residence then you are usually entitled to Principal Private Residence Relief or PPR. In order to protect your entitlement to PRR, your rental agreement will need to state that the availability of the room is only based on specified periods during each week or month, such as between 9am and 5pm, Monday to Friday, the key point being that the home office is not exclusively used for business purposes. However, there is still the possibility that HMRC could challenge that view and disallow a portion of your PRR claim when your home is sold. It has happened before.
When purchasing office furniture such as a computer desk, filing cabinet or chair, you should consider whether there will be any personal use of the item as this could have an impact on whether it is considered an allowable expense. If your private use of the item is insignificant, then you will need to be able to demonstrate this to the satisfaction of HMRC, although if the item cost is deemed reasonable, usually under £300, then it is unlikely that inclusion as a business expense would be questioned.
If you are called upon to justify the usage of your furniture, then you will need to consider how much time you spend using the item for business purposes as well. For instance, if you have an item of furniture which you only use intermittently for work purposes, it will be difficult to prove that your personal use is less significant than your work use.
Use of the home phone
If you make any phone calls from your home phone in the course of doing business, then these can be reclaimed as an allowable expense, but only the cost of business calls and no portion of the line rental if it is also used for personal calls. Many people find that the sums are so small and the time it takes to go through bills to reach a final figure means that it is often not worth claiming for phone calls. However, but this will depend on individual circumstances.
In cases where your business needs justify having a second line installed purely for the purposes of making and receiving business calls, then the total cost of this line can be claimed. The line will need to be in the business’s name and with all bills being paid from the business bank account in order to demonstrate that it belongs solely to the business.
HMRC’s criteria for a business needing a phone are:
- There is a clear business need for the employee or director to have a phone such as their role involving the making and taking of calls
- The employer should take reasonable steps to keep track of and reduce the costs of any private use through a clear policy which limits or prohibits personal calls
- The provision of the phone cannot be considered as a reward to the employee (otherwise it will be a benefit-in-kind).
It is possible to claim the cost of your internet access at home provided the following conditions are met:
- There is no separate billing or record kept of access connections
- No distinction is possible between work and personal connections
- Personal use is insignificant
- The contract for provision of internet access is in the name of the business and paid from the business bank account
If you only have one internet connection at your home then you can claim for the business use of the service, but if there is no separate billing or log of usage which can determine between personal and business use then no claim will be allowable.
The phone line used to connect to the internet is considered separately to the contract for provision of internet access itself. If you wish to claim for the cost of the phone line then it will need to meet the criteria set out for claiming for a home telephone.
HMRC example of expense claims for use of home
You can find examples of how HMRC interpret appropriate expenses of the use of a home office at the following link HMRC examples.