The HMRC Home Office Tax Deduction Rules - MileIQ

Summary

One of the benefits of being self-employed is working from home. Make sure you understand the HRMC use of home as office tax deduction rules, though.

How do I calculate the use of home as an office tax deduction?

One of the benefits of being self-employed is working from home. Make sure you understand the HRMC use of home as office tax deduction rules, though.

How do I calculate the use of home as an office tax deduction?

You can go about this in one of two ways.

The first way is to use simplified business expenses. This involves looking at how many hours you spend working from home each week and deducting a flat rate from your taxes.

Using simplified business expenses is easy and straightforward. However, the tax deduction itself is usually quite small. In addition, the flat rate doesn't include telephone and internet costs. You'll need to calculate these expenses separately.

The second method is called the actual costs method. As the name suggests, this involves calculating your home's running costs, such as rent and utilities. Then, you'll need to deduct the business proportion of those costs.

The actual costs method requires more effort. That said, depending on your circumstances, it could mean a larger use of home as office tax deduction.

HMRC's simplified expenses checker can help you decide which method would work best for you.

Who can use simplified business expenses?

You can use simplified business expenses if:

You're a sole trader

You're in a partnership and all the other partners are individuals

You work from home more than 25 hours a month

You're not VAT registered

You have to register for VAT if your turnover is more than £85,000 per year.

How do I calculate simplified business expenses?

Step 1: Calculate how many hours you work each month

Step 2: Use HMRC's simplified expenses table (which we've reproduced in the example below) to find out your monthly flat rate.

Step 3: Multiply the flat rate by the number of months worked

Step 4: Calculate the business proportion of your telephone and internet costs by dividing your bill by the number of hours worked

What are the HMRC rates for a home office?

Calculating simplified business expenses: Example

During 2018/19, you worked from home 150 hours a month for 10 months. However, in November and December, you only worked 40 hours a month (gotta have your rest right?).

You also paid £30 a month for a fixed line and broadband package.

This means you can deduct £26 a month for the 10 months you worked 150 hours a month. As for the two months in which you worked 40 hours a month, you'd deduct £10 a month.

So: (26 x 10) + (10 x 2). This means you'd deduct £280.

To deduct the cost of your broadband and phone package, you'll need to figure out the percentage of business use.

You've worked 1580 hours in 2016/17 (150 hours multiplied by 10 months plus 40 hours for two months). And there are 8760 hours in a normal year (24 hours multiplied by 365 days). So, your percentage of business use is 1580 / 8760 multiplied by 100, that is 18 percent.

This means you can deduct 18 percent of your yearly broadband bill: (£30 x 12) / 18%, that is £65.

How do I deduct my actual home office costs?

Unfortunately, HMRC don't have a formula or exact method for this. They simply say that you have to divide your costs between business and private use in a way that is "reasonable."

The most common way to go about this is to divide your total expenses by the number of rooms you use for business. You then multiply this figure by the percentage of time you use the room for business.

It goes without saying that keeping good records of your expenses is super-important. This will make it easier for you to calculate your use of home as office deduction. HMRC may also ask to see your records in order to make sure your claim is accurate.

What counts as a room?

Here again, HMRC is quite vague, describing a room as a "normal living space." However, many accountants seem to agree that the kitchen, bathrooms and hallways do not count as rooms. This means only the living room, the bedrooms and the room you use as an office count as rooms for tax purposes.

You should also note that, while in theory you could claim a deduction on more than one room, this may attract HMRC's unwanted attention.

Of course, you may have a perfectly valid reason to claim a deduction on two rooms. For example you might be a photographer and you're claiming a dark room and an office. If, however, you simply like to work in different rooms to mix it up, it's probably best to claim a deduction on just one room.

Even if you use a room mostly for business, it's worth using it for personal reasons part of the time. For example, you could use it as an exercise room or hobby room. This is because, if part of your home is classed as a business space, you may have to pay capital gains tax on it should you decide to sell it.

The HMRC Home Office Tax Deduction Rules - MileIQ
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