Tax implications of home working

According to the Trades Union Congress, 1 in 20 people worked from home in 2005. By 2018, that figure had leapt to 1 in 16.

If you're self-employed, working from home can help keep costs down but also has certain tax implications worth considering before going down this route.

Business expenses

In theory, allowing self-employed people to deduct certain expenses from their turnover gives a more accurate reflection of profits, and thus makes for a fairer tax bill.

What's tricky is working out what expenses count as allowable, with the basic rule covering expenses incurred ‘wholly, exclusively' in the running of your business.

Operating out of your home blurs the lines between business and your private life. For example, is your household electricity bill a legitimate business expense?

Some might claim against the whole bill, thinking it's straightforward and easy but quite the wrong approach, and could get you in trouble.

Conversely, some people opt to simplify it again by claiming nothing, and thus missing out on a benefit they are fully entitled to claim.

The correct approach, according to HMRC, is to make a sensible estimate of the proportion of the bill that applies to your work, and claim only against that.

If you can show you have acted in good faith, the Revenue is usually quite tolerant of sensible guesswork.

Keep the records of your calculations in case they are queried later, along with all the original bills, including phone bills, and even gas and heating statements.

Allowable expenses

HMRC's Business Income Manual sets out in exhaustive detail what can and cannot be claimed as a business expense by self-employed people.

Its section on home working is typically thorough and comes with a slew of eye-opening examples. For instance, meet Dave:

"Dave has the outside of his house painted and his dining room redecorated at the same time. What can he claim as a deduction?

"The exterior painting is a general household cost, and he can claim a proportion based on business use.

"Dave does not use his dining room for business purposes, and the cost of redecorating it is not an allowable expense."

Because of the complexity, each case is usually judged on its own merits.

Simplified expenses claims

If you're a sole trader and work from home for more than 25 hours a month, the process is streamlined further, thanks to an optional flat-rate system.

It allows you to sidestep some of the detailed calculations and make a claim based on the following thresholds:

Hours of business use per month Flat rate per month
25 to 50 £10
From 50 to 100 £18
Above 100 £26

 

 

 

 

 

This only applies to utilities, though - not telephone bills, because they can more easily be itemised, or broadband, to name two examples of exceptions.

Unfortunately, streamlined or not, there may be some sums to be done.

For example, if you worked 60 hours a month from home for eight months (8 × £18) then cut down to 30 hours a month for the remaining four (4 × £10), you could claim £184 for the year.

A capital gains tax trap?

If you have a room in your house that you use only as an office, it could reduce the amount of capital gains tax relief you can claim when you sell the property.

This specific part of the property won't qualify as a ‘private residence' and so falls outside the bounds of that particular tax relief.

Few home workers have the luxury of an office - it usually is the spare bedroom, home gym, or storage space.

We can help with your business accounts.