I have heard varied claims from people about what they can charge to their company for use of their home as an office; claims range from up to 1/3 of their mortgage and household bills to just a couple of pounds a week.
My accountant is on the conservative side and always keeps any claims well below the level that will draw the attention of the tax man, so I decided to look into this to see if there was enough scope for me to get more.
After spending a couple of hours on the Inland Revenue web site I found the answer and it looks like everyone was wrong.
I suppose I had better clarify matters. What you can or cannot claim depends on how you run your business; from what I have read, the rules are different for the self-employed and for limited companies and they are different for company director and employees.
Directors of Limited Companies
If you are a small service company (i.e. director and sole employee), to claim anything you have to carry out substantive duties of employment (this is the Inland Revenue wording not mine) from your home and not have the opportunity to do these at your client's site; if you could work at a client's site and choose to work from home, this does not count in your favour.
You could claim that you need to have a base for your company and you cannot do the paperwork from your client's office, but this has been tried before in court and has been found in favour of the tax man. The Inland Revenue has a page dedicated to this and some examples to see if you fall inside or outside of this rule (EIM32805, EIM32806, EIM32807).
If you do carry out substantive duties of employment from home you can claim expenses for your variable costs, i.e. the additional costs of:
metered water costs (not if you have a fixed charge for water rates).
business phone calls (including dial-up internet access).
You can claim up to £2/week for these (excluding business phone calls) without having to provide proof to back up your claim.
You need to provide itemised proof for your phone calls.
You are not eligible to claim expenses for any of the fixed costs of running your home:
water rates (fixed water rates rather than a water meter)
Do not get confused between what you can claim as a limited company director and what you can claim if you are self-employed
That was a bit of a shocker!
This is for people who are self-employed (e.g. sole traders or working through a partnership) rather than directors of limited companies.
The rules for the self-employed are more flexible that for directors of limited companies; as someone who is self-employed, you are allowed to claim expenses for spending time doing admin and associated work at home and this does not have to form substantive duties of employment (see above) to be able to claim. You can also claim for the fixed costs of running your home (on a pro-rata basis) as well as the variable costs.
For minor use of your home (i.e. a few hours/week updating your company records) the Inland Revenue will not ask for records to back up a claim of up to £2/week to cover all costs (with the exception of phone calls for business use).
If you are looking to claim more that this, you will have to produce the evidence to back up your claim.
First of all, the part of your home that is being used for your business must be used wholly and exclusively for business purposes. Before you get too carried away, what this means is that while you are working from home, the area you are claiming expenses for must only be in use for business purposes; the rest of the time it could be used for non-business purposes, but this has to be taken into account when you are working out your business costs.
Working out Costs on a Pro-Rata Basis
Costs have to be worked out on a pro-rata basis. What this means is that they have to be in proportion to the total costs. You can work out your costs based on the proportion of floor space you use when operating your business (e.g. if you have an open-plan house) or based on the number of habitable rooms (exclude the kitchen and bathrooms) in the house. You also have to take into account the amount of time you are using the area for business purposes as opposed to non-business purposes.
These are items that, generally, will remain the same whether or not you are working from home.
- Insurance - if you have separate insurance to cover your business operations at home, then you can claim this as a company expense, but none of your normal household insurance. If you do not have separate business cover, then you can claim part of your household insurance on a pro-rata basis.
- Council tax - pro-rata basis.
- Mortgage interest or rent - on a pro-rata basis. Note that it is only mortgage interest (not capital repayment) or, if you are renting, it is based on the rent paid to the landlord, you cannot sub-let part of the property to your business.
- Repairs and maintenance:
- general repairs (such as repainting the exterior of the house) can be claimed on a pro-rata basis.
- repair/mainenance of areas used for business purposes can be claimed for in full (assuming you are not doing something silly, like claiming for carpetting / redecoration refitting of your open-plan lounge/diner/kitchen because you have a desk in a corner - use common sense).
- repairs/maintenance of areas not used for business cannot be claimed for.
- Broadband - if this is used solely for business, then you can claim all of it as an expense, otherwise it must be claimed on a pro-rata basis. This should be based on the time it is used for business / non-business use and not on the proportion of the house.
These are things which are likely to go up the more you work from home:
Utility bills - gas / electricity / water should be claimed on a pro-rata basis.
Phone bills are usually itemised and you can see how much you can claim for outgoing calls. You can claim a portion of the line rental as well, but this has to take into account how the incoming calls are split between business / non-business - don't ask me how to do this.
Note that water bills can be either a fixed or variable cost depending on whether you pay for a metered service or a fixed water rate. It doesn't really matter here as you will pay for either on a pro-rata basis.
The ever-helpful Inland Revenue web site has some examples to show you how you can calculate how much you can claim.
If you want to read some of the background on this, look at BIM47800 on the Inland Revenue web site.
Trust the Inland Revenue to have different rules for the self-employed and for limited companies. Can't these people be consistent about anything.
I have a headache now I think I am going to have a lie down in a dark room...
...preferably, a room with padded walls.