AS the UK has heads deep into lockdown due to coronavirus, many are getting used to the trials and tribulations of working from home or remote working. Recently the government announced a much criticised £10,000 home working allowance for MPs. But what of the average person working from home? Can they access any tax breaks? In this article we discuss the general tax reliefs available when working from home.
Note: this article is intended for general guidance only and does not constitute accountancy, tax or other professional advice. We recommend you seek specific advice based on your circumstances.
Different rules apply depending on whether you are an employee or self-employed or a company director when claiming tax relief against income or profits for the costs of using your home for business purposes. As such the tax breaks can be broadly split into three:
- Employee homeworkers
- Self-employed traders, Partners and Landlords
- Company Directors
Employee homeworkers
The general rule for employee homeworkers is that they may claim expenses only if incurred wholly, exclusively and necessarily in performance of their employment duties. This generally excludes expenses which are part-business/part-private.
If an employer reimburses an employee’s expenses under a home-working agreement there will be no tax liability for the employee provided that the expenses qualify for relief under the general rule.
Where home working is undertaken by personal preference no claim is possible, however as most employees are home working due to government guidelines meeting this criterion should not be a problem.
Type of expenses
Claims for tax relief will be limited to metered use of light and heat and itemised telephone calls. Claims for other costs may be possible depending on the nature of the employment.
Instead of claiming actual expenses there is an HMRC approved allowances that can be claimed. This is at a fixed rate of £6 per week or as agreed by the employer via a dispensation agreement with HMRC.
How to claim
For those not completing tax returns, normally the costs incurred for working at home should be re-imbursed by your employer. If this is not available, then HMRC allow for employees to claim direct via their online portal.
To claim these expenses, you need a Government Gateway user ID and password. You can create a user ID if you do not already have one. For this you would need:
- your National Insurance number
- a recent payslip or P60 or a valid UK passport.
Tips and pitfalls
If an employer reimburses an employee’s expenses under a home-working agreement there will be no tax liability for the employee provided that the expenses qualify for relief under the general rule. This strategy is more beneficial for the employee because the employer bears all the costs.
Self-employed traders, Landlords and Partners
As a general rule working from home means you can claim part of your household costs for tax purposes as long as the expenses is incurred wholly and exclusively for the purposes of the trade. This is the case even if you have an office or other business premises.
What expenses can be claimed?
As self-employed person working from home you are entitled to claim a proportion of most household costs, including but not limited to:
- Mortgage interest or rent
- Council tax
- Water rates
- Repairs and maintenance
- Building and contents insurance
- Electricity
- Gas, oil or other heating costs
- Cleaning
- Gardening
Claims should be based on the proportionate use of the property for the business. This comes down to how much time is used and how much space is used, i.e. how much space is set aside for business use and how much time is spent on business. Given the current coronavirus lockdown it is likely that the time element will be greater than usual.
A proportion of general repairs and maintenance costs relating to the whole property, such as roof repairs or gas maintenance costs may be claimed. Costs which are specific to an area used for work may be claimed in full – subject to any reduction required for partial private use of that area.
Redecorating a study used for work would be an allowable cost, for example. The flipside of this is that any costs specific to a wholly non-work area may not be claimed at all.
Some calculations may benefit from using floor space instead of rooms. If the business requires a lot of space and the room used is actually the largest in the house, then it would be better if the calculation was done based on floor space rather than rooms.
Any furniture and equipment used for business can claimed 100% thanks to something called an annual investment allowance, although this is subject to a reduction for any private use.
How to calculate the business proportion?
HMRC do not provide any hard and fast rules here, the overriding factor that it is reasonable and justifiable.
As such, there are many possible methods for calculating the business proportion. Generally, in practice, the most popular method is to simply take the number of rooms used for business as a proportion of the total number of rooms in the house. Hallways, bathrooms and kitchens should be excluded from the calculation. So, for example if you use one room in your house as your office and the house also has two bedrooms, a living room, a dining room, two bathrooms and a kitchen then for the purposes of our calculation you can claim one fifth of the household costs (you ignore the bathrooms and the kitchen). Note that you would need pro-rata this for the tax year on a time spent basis. (see below).
Some calculations may benefit from using floor space instead of rooms. If the business requires a lot of space and the room used is actually the largest in the house, then it would be better if the calculation was done based on floor space rather than rooms, as this would normally produce a greater deduction.
Smaller properties
For smaller properties, calculating the business proportion based on floor space or number of rooms may not be suitable, instead it will often make more sense to make claims on a time basis instead. For example, someone working from home with a one bedroom flat it would be difficult to proportion things on a space used basis, as effectively the whole flat will either be used privately or for business. Hence in this scenario the argument is that there is “work”, “rest” and “play” taking place at any given time, accordingly claiming a third of the household costs would be arguably justifiable.
Using a room solely for business purposes may affect any capital gains tax (CGT) exemptions you could be eligible for on the sale of your home. This exemption, which you usually get when you sell your home, is restricted if part of the house has been used exclusively for business.
Part time workers
Similarly, part time workers would need to apply a further adjustment to take account of the fact that less time is spent at home working. Establishing this reduction needs to be considered on a case by case basis. The key watchword to remember is that the calculation has to be reasonable.
Protecting your Capital Gains Tax exemption
Using a room solely for business purposes may affect any capital gains tax (CGT) exemptions you could be eligible for on the sale of your home. This exemption, which you usually get when you sell your home, is restricted if part of the house has been used exclusively for business. Fortunately, as long as there is private use of each room in the house, no matter how small, your CGT relief is safe. This does mean that your home as office claim has to be restricted, but experience shows that on average the trade-off is worth the potential tax savings made on sale.
Flat Rate Deductions
Like employees HMRC have provided trading businesses a system of flat rate deductions for business use of your home.
The flat rate deductions are an alternative method available instead of the proportionate calculation methods discussed above. The amount of the deduction is calculated on a monthly basis according to the number of hours spent wholly and exclusively working on business matters. The rates applying start from £10 per month rising to £26 per month for 25 to 101 working hours respectively. Experience suggests you would almost certainly be better off carrying out a proper calculation and claiming a suitable proportion of the actual household running costs direct.
Although it is worth noting that the flat rate does not include telephone or internet expenses. The taxpayer can still claim the business proportion of these costs by working out the actual costs.
Company directors
Directors and other employees may only claim the specific additional costs of working from home. Where it is impractical to calculate the exact costs, HMRC permit a claim of £6 per week.
HMRC stipulate that the director must also be required to work from home: simply choosing to do so is generally not sufficient. If you run your company from home and have no other business premises, then this is pretty straightforward.
The calculation methods outlined above for sole traders can also be applied here.
Type of expenses
As with employees, claims are limited to metered use of light and heat and itemised telephone calls. Claims for other costs may be possible depending on the nature of the employment on a reasonable and justifiable basis.
Requirement to work from home
HMRC stipulate that the director must also be required to work from home: simply choosing to do so is generally not sufficient. If you run your company from home and have no other business premises, then this is pretty straightforward. In other cases, there will be a requirement to demonstrate a genuine need to carry out your duties at home and there may also be a need to stipulate this requirement to do so in the employment contract.
However, due to the current COVID-19 lockdown, it is clear that many company directors are required to work from home under Government guidelines. Hence, at present, it is arguable that there is no need for this to be included in an employment contract and most small company directors should be able to claim a deduction for working from home – either at £6 per week or a greater amount if detailed calculations support it. As above, long-term exclusive business use of one part of the property should be avoided so as not to affect the CGT exemption on sale of the home.
A better solution in many cases maybe for the company director to enter into a “licence to occupy” agreement with the company for “non-exclusive” use of an office space in the director’s house.
In order to get tax relief, extra salary over and above the personal allowance will be required. This will lead to additional National Insurance costs. However, this extra tax liability can potentially be avoided, if the company reimburses the director’s expenses under a homeworking agreement provided of course that the expenses qualify for relief under the general rule.
Licence to occupy?
A better solution in many cases maybe for the company director to enter into a “licence to occupy” agreement with the company for “non-exclusive” use of an office space in the director’s house, i.e. an appropriate agreement to rent space in your home to the company. A suitable proportion of all household costs can then be deducted from the rent received and no National Insurance will be due. Additionally, the company will also be able to claim Corporation Tax relief for the rent paid. Furthermore, by granting the company a ‘non-exclusive licence to occupy’ the relevant space, and maintaining some private use outside working hours, any restriction in CGT relief on your home can be avoided.
If you need help with this or any financial or tax issue please call us on 0114 272 4984 or email info@shipleystax.com – we are ready to help.
