In an earlier blog entry (taken from an article I produced for Enterprise Nation) I covered the very basics of this subject. In a more recent article, for BHP Publishing, I was asked to explain the subject in a little more detail. This article is reproduced below:
One thing that any small, home based business owner will need to know is; “What expenses can I claim for running my business from home?"
Surprisingly, there are no ‘standard’ or recognised methods of calculating these allowable expenses, although there are a number of conventions and guidelines which we, in the profession, tend to adhere to.
In the ‘good old days’ we accountants would simply claim a global ‘round sum’ amount (often about £20 - £30 per month) to cover these costs, which was never challenged by HMRC, as it was not significant or worth amending.
However, since 2004, the limit of these round sum amounts has been capped at £2 per week (or £104 per year). Anything above this rate is increasingly likely to trigger an investigation.
If we feel that the £2 is insufficient, we can claim specific costs, based on actual expenditure.
• We must actually work from home, and have a dedicated area for this work (doing the books on the kitchen table once a week simply won’t cut it)
• Expenses must be ‘wholly and exclusively’ for the business. If mixed usage (part business, part personal) the business part must be separately identifiable.
• Where an area of the house is used partly for business, and partly for personal, the expenses will be apportioned by time used, as well as floor area utilised.
What Can We Claim
The following property expenses can be claimed:
• Light and Heat
• Rent / Mortgage Interest
• Council Tax
• Water Rates
• Property Insurance
• Re decoration and repairs (internal and external)
Calculating ‘Business’ Element
As a general rule, we tend to apportion all of the above costs on the basis of floor area utilised. In reality, this may be difficult to calculate, so it is perfectly acceptable to work on the basis of numbers of rooms in the house. If, for example, we use one room for business purposes, and there are four further rooms, the business element will be 1/5, or 20% of the total running costs of the home. If we further estimate that this room is used 50% for business, and 50% personal, the percentage claimed will be halved to 10%.
Other Claimable Costs
In addition to our home, we can claim any expenses utilised ‘wholly and exclusively’ for the purposes of the business, including:
• Telephone (including line rental) apportioned by call time (incoming and outgoing). A dedicated business line can be claimed in full.
• Broadband (as telephone costs)
• Business insurance
• Repairs to business equipment
• Capital allowances (wear and tear) on business equipment. (including computers and peripherals, office furniture and fixtures such as shelving etc).
• Printing, stationery, postage and advertising
• Computer software used for business
• Travelling and subsistence costs (a whole topic in it’s own right). Subsistence relates to the ourselves only. Any entertaining of suppliers, business associates and, even, customers is totally disallowable.
• Motor expenses of running business vehicles (less any personal element).
Examples of expenses claims we can make in certain circumstances are given in the HMRC guidance manual; http://www.hmrc.gov.uk/manuals/bimmanual/BIM47825.htm
When claiming expenses relating to our home business, we need to be aware of some potential issues:
• We can claim any costs directly attributable to the business working area of our home (such as decorating the home office, installation of specialist equipment, additional utility supplies, insulation etc) However, if we treat a room as being 100% for business, then, on the sale of our house, the percentage of the sale relating to the ‘business’ area will, potentially be subject to Capital Gains Tax. This will only be an issue where a significant profit is made, as smaller gains will be covered by our annual exemption. **UPDATE** From June 2008, HMRC have announced that this will no longer be an issue, and that capital gains tax will no longer be charged where home business expenses, such as mortgage interest etc are claimed against profits.
• Most mortgage companies ask us to stipulate whether or not there is a business element to our occupation. We may need to be able to prove to them that we have separate business insurance to cover us for this.
• Running a business from home may attract the attention of the Valuation Office Agency who will determine whether or not a property will attract business rates. Guidelines for this can be found at: http://www.voa.gov.uk/council_tax/working_from_home.htm
Legislation is constantly being updated, and the only piece of advice that never changes is; Always check with your accountant, when looking to claim or calculate these expenses.
For the 2008/09 tax year, the flat rate allowance has been increased from £2 to £3 per week.