Allowable expenses when using home as office | ACCA Global

Summary

Working from home may be many people's dream come true. Whether it’s the employee of a forward thinking company in need of work flexibility, or a small business looking for a cash-flow head start through the reduction of overheads, working from home is likely to appeal to most.

There are many non-tax pros and cons when considering working from home but if you have made the decision what allowances and reliefs can you claim?

This article provides a quick reminder of the detailed provisions applying to the deductibility of such expenses, and highlights some of the pitfalls taxpayers encountered in the past, as demonstrated by some tax cases. This article does not deal with travel expenses.

Working from home may be many people's dream come true. Whether it’s the employee of a forward thinking company in need of work flexibility, or a small business looking for a cash-flow head start through the reduction of overheads, working from home is likely to appeal to most.

There are many non-tax pros and cons when considering working from home but if you have made the decision what allowances and reliefs can you claim?

This article provides a quick reminder of the detailed provisions applying to the deductibility of such expenses, and highlights some of the pitfalls taxpayers encountered in the past, as demonstrated by some tax cases. This article does not deal with travel expenses.

With regards to expenses associated with working from home, the ‘wholly, necessarily and exclusively’ mantra so pivotal in taxation applies uniformly to a self-employed, a director, or an employee, as it is included both in the legislation applicable to the self-employed and that applying to employees. In practice, however, various costs incurred may in fact serve both a business and a private purpose. Should these costs be approportioned or excluded altogether? Are those costs treated in the same way by a sole trader, an employee and a director?

The legislation underpinning the deductibility of expenses associated with working from home for the self-employed is s34 of the Income Tax Trading and Other Income Act 2005 legislation, which can be summarised as follows:

Expenses incurred wholly, necessarily and exclusively for the purposes of the business can be claimed in full. Expenses incurred solely for private purposes or for purposes incidental to business (so mostly private) cannot be claimed at all. Expenses incurred for a dual purpose (both business and private) can only be claimed if it is possible to identify a specific part used for business. If it is impossible to identify and measure the proportion of the cost incurred which relates only to business, no amounts can be claimed.

For example, the cost of smart business attire cannot be claimed against tax, as it is impossible to separate the business use from the private use of clothing. Whilst smart office clothes serve a business purpose, their private purpose (clothes are seen to be used for warmth and decency) is primary, ever-present, constant and simultaneous to the business purpose. It is not possible to separate the two, so condition 3 above is not met.

On the other hand, costs of computer repairs carried out on equipment used for eight hours a day by a sole trader to build websites for clients, and two hours in the evening to watch movies in private time, can be time-approportioned and the business part deducted for tax purposes, as condition 3 is satisfied.

The following are examples of costs usually expected to be approportioned, before being deducted for tax purposes:

rent if home is rented, or mortgage interest if owned

council tax

water rates, only if metered

light and heat

telephone line rental, internet, and cost of calls

home insurance

house repairs

business equipment repairs

cleaning

revenue expenditure in connection with converting part of home into office

capital allowances for tools in connection with the above

capital allowances for business equipment and business fixtures and fittings.

It should be pointed out that approportioning a private expense in a sole trader’s tax accounts does not mean that the business incurs a liability that will be discharged by refunding cash. There is no separation between the sole trade and the individual running the trade, in the same way the director as an individual and his company are separate. A sole trader therefore can deduct rent in proportion to his home used as business premises, but cannot charge and refund himself rent.

There are various methods to approportion expenses, all valid as long they can be justified and based on evidence. Rent or mortgage interest, council tax, light and heat, home insurance, repairs to common parts of the building and cleaning can be approportioned based on the number of rooms or floor space used for business.

Costs should be further restricted if there is a significant, not incidental, element of private use. In instances where a fixed charge is incurred irrespective of consumption, for example in case of unmetered water rates, no claim is possible.

An element of judgement is involved when calculating business part, and this may vary depending on which cost is approportioned. For example:

Every day, Tina’s lounge is used for 10 hours for business purposes and 3 hours for private purposes. For 11 hours the room is unoccupied. The lounge represents 20% of the size of the property. The total annual cost of light is £1,100. Total annual mortgage interest is £900.

As the room is not lit or heated for 11 hours when it is unoccupied , there is a case for deducting 10/13 of the 20% of total light and heat costs to business, therefore £1.1k x 20% x 10/13 = £169

As mortgage interest is payable whether the room is occupied or not, there is a case for charging only 10/24 of mortgage interest to business attributable to the 20%, so £900 x 20% x 10/24 = £75

Approportioned amounts should:

Be reasonable and not excessive Reflect the characteristics of real expenses - you should be able to demonstrate that you have actually spent the money in the period when the amounts are deducted. For example, if you deduct repairs and renewals, there needs to be evidence of the money actually spent by you. In addition, in relation to relevant expenses, HMRC may expect to see year or year fluctuations, as use of home may differ year on year depending on business activity Paid by the self-employed and not someone else, for example a relative.

HMRC includes examples of work from home expense approportionment at BIM47825 and also question 7 in the Private and Personal Expenditure Toolkit.

Allowable expenses when using home as office | ACCA Global
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