What Expenses Can We Claim For Working From Home?

Something we are often asked is; “What expenses can I claim for running my business from home?”

Briefly, we can claim household running costs as follows:

Telephone

Firstly, we need to calculate the business element of the calls. The Revenue will now only accept a figure that has been calculated from at least two telephone bills from each line / mobile used over the year. In practice, this means going through the itemised bills to identify business / personal usage.

You don’t need to identify every call, but will need to calculate the business percentage of those you can.

Whilst this may seem a lot of effort, bear in mind that, without adequate evidence, the Revenue will not allow ANY costs against the business. Also, you only need to do this for a couple of bills, just to establish a pattern.

Use of Home As Office

This is a global allowance, designed to cover us for the element of the home used for business purposes.

The simplest way to carry out the calculation is to add up the annual costs (as applicable) of:

· Gas / electric / solid fuel
· Council Tax
· Contents / buildings insurance
· Water rates

Remember to keep all the bills to support these amounts.

Next, we simply count up the number of principal rooms in the house (kitchen, reception rooms, bedrooms, bathroom etc). If there are seven, and one is used for half for business, and half personal (eg spare bedroom / office) then we would allow half of one seventh.

We should remember that this ‘allowance’ is a Revenue concession, and is not supported as business expenditure in Tax Law.

Sticking to the Revenue guidance will avoid any suggestion of liability to Capital Gains Tax on the part or parts of your home you use for business.

You may have exceptional circumstances depending on your business, in which case, the calculation can be adapted. The more information you can provide, the easier it is for your accountant, and the greater the protection in the event of Revenue Enquiries.

When Do We have To Register For VAT?

There are many misconceptions, amongst new business owners, as to when we should register for VAT. There is, however, no legal requirement to do so, until the business turnover exceeds the registration threshold (currently £67,000) though this is applied on a pro rata basis.

In other words, if turnover in a three month period exceeds £17,000, and it is likely that it will continue to do so, then registration is required immediately.

It is possible to register for VAT voluntarily, even if you are below the Registration Threshold.
Reasons we might want to would include:

* In order to reclaim the VAT incurred on large initial capital outlays at business start up. (Equipment, vans etc).

* To reclaim VAT on ongoing purchases and expenses, thereby making them 17.5% cheaper. (although we should be wary if we are mainly selling to the public).

* To improve company image. If a company is not registered for VAT, then any potential large customers will realise that its turnover is below £67,000, and may refuse to deal with such a small company, on the grounds that its continuity cannot be assured. This will be a potential issue for any of us working from home.

When considering voluntary registration, you need to be aware of who your customers are. If we are dealing mostly with business customers, then they will, in the main, be able to reclaim any VAT that we charge on our products and services.

If, on the other hand, we mainly deal with the public, they are unable to make such a reclaim and our goods and services immediately become 17.5% more expensive. Alternatively, we can make our current prices VAT inclusive, and lose out on the extra profit. Either way, this will be a major factor in choosing whether or not to register for VAT before we actually need to.

How Do I Run My Vehicle Through The Business?

One area that most new business owners need to know about is how to run a vehicle (including, where applicable, their own car) through their business.

The answer to this will mainly depend upon whether you are running the business as a sole trader or a limited company, as follows:

Sole Trader

As a sole trader, YOU are the business, and your car automatically becomes part of the business, for tax purposes. In this scenario, you are simply required to keep a record of your business mileage, which can then be compared against the vehicle’s total mileage for the year, to give a ‘business’ percentage. If, for the sake of argument, this works out as 60%, you can then claim 60% of the entire running costs of that vehicle, including fuel, tax, insurance, repairs etc.

Limited Company

This is a totally different scenario, as the limited company is a separate legal entity in its own right. This means that, if you simply pay for the car through the business, then the company is, effectively, providing you with a company car, which will be subject to tax like any other employee. The last thing any of us want is to be taxed for using our own vehicle.

The way around this is to use what is know as the Fixed Profits Car Scheme, whereby we can claim a set mileage rate from the business, which we then use to finance the running of the vehicle. This way, the company indirectly pays the motoring costs, but there is no tax implication, and the vehicle remains your own property.

The FPCS rates are 40p per mile for the first 10,000 miles a year, and 25p per mile thereafter.

What Do We Do About PAYE / NI, Once We Are Self Employed?

From commencement as a self employed person, you will be required to pay Class 2 National Insurance, which can be paid weekly, monthly or quarterly.

This is paid at the rate of £2.30 per week, and covers the taxpayer for profits of up to £5,435. Anything over and above this is subject to Class 4 National Insurance, at 8% (up to a maximum profit of £40,040 per year, after which the rate drops to 1%).
For limited companies, it is possible to pay yourself a salary of approximately £105 per week, without paying PAYE or NI, with the majority of remuneration being taken by way of a dividend, which, as investment income, is not subject to National Insurance.

However, to ensure a minimum contribution is paid, thereby ensuring future pension and other benefits, we recommend the payment of a slightly larger salary to each director (usually around £5,500 - £6,000 per annum).

In order to minimise work (and therefore cost) recent changes in NI legislation mean that this salary can now be paid annually, as long as the recipients are also directors.

When Do I Have To Tell The Tax Man About My Business?

Many of us will have started out on a part time basis, whilst still holding down a full time job, until we are ready to ‘take the plunge’ into a full time business.

Often this will either be in the same line of work as our main employment, or it could be the development of a personal hobby or interest.

So, if it’s just a little income on the side, when do we have to register as a ‘proper’ business, with the Inland Revenue etc? Unfortunately, the ever benevolent Tax Man now requires us to register immediately, as soon as we have undertaken our first piece of self employed work.

A few years ago, we were able to notify the Inland Revenue at the end of the first year’s trading, on submission of the first year’s accounts and tax returns. This is no longer an option, and we are now all obliged to advise H M Revenue & Customs, by completion of a Form CFW1, within 3 months of undertaking our first piece of self employed work. Failure to do so will now result in an automatic fine of £100.

Once registered, you will now be classified as self employed, and you will be sent a Self Assessment Tax Return to be completed annually, showing your income and expenses from your self employment as well as details of your employment. You will be subject to tax and national insurance on any profits you make, but the good news is that any losses incurred (which is quite common in the first year or two) can be offset against your employed income, which will usually then result in a tax rebate.

So. There is no such thing as ‘casual part time income’ from self employment. You must register immediately, or face financial penalties. As the business continues to grow, you will then need to consider the tax advantages offered by the setting up of a small limited company.

Welcome

Hello all, and welcome to the very 1st blog from myself, Alan Young, of 1st Addition Accountancy.

The aim of this blog is to provide a general forum to exchange information and ideas on any matters accounting and business.

A large part of my time these days is spent in an advisory capacity, assisting new and expanding businesses in every aspect of their ongoing growth and development.

Due to my expertise in these fields, I am often called upon to provide features and articles for numerous magazines and web sites, including http://www.enterprisenation.com/, a free resource, to help you start and grow your home based business.

I shall, from time to time, be posting some of these articles here on our blog, and all comments from readers are always welcomed.

Alan Young, FCCA
Managing Director