Use Of Own Home For Business
Summary of Key Points
- A round sum claim of £4 per week should not be challenged.
- Anyone using part of their house more than 2 hours per week can probably claim more than this.
- Such a claim must be based on the area of the room and time the room is used for business.
- Reasonable claims for general household costs should be accepted.
- Never claim that a room is used 100% for business unless you want a big tax bill when you sell the house.
It’s common for self-employed people to use part of their house for business purposes. In some cases, this will just be for a few hours a week to deal with admin. In other cases – such as an e-bay trader – this will be the sole or main location for the business. There are strict rules on how much can be claimed for tax purposes on the costs involved.
These rules apply only to the self-employed. Employees who spend all or part of their time working from home are very unlikely to be able to claim any tax relief at all for the costs involved. In general, if there is any element of personal choice in the matter, no relief is allowed for the employee or director – where the company has premises nearby which that person could choose to work from.
£4 per week – the Lazy Option
HMRC will not make any enquiry into your tax return if you claim a flat £4 per week for using a room in your home for business purposes – £3 prior to April 2012. This could well be the best option, especially if you only use the room for a few hours per week.
The Apportionment Option
£4 does not go very far in the $100 per barrel era. For a bit of additional effort, many self-employed people can reduce the tax they pay. They do this by calculating more accurately the costs of their home which can reasonably be apportioned to the business. The HMRC inspector should accept all reasonable claims made, but can ask to see some evidence as to how a given % has been arrived at.
Costs You Can Claim a % Of
http://www.hmrc.gov.uk/MANUALS/bimmanual/BIM47825.htm is the link to follow for seven specific examples given by HMRC of these cost calculations. From this, it is clear HMRC will accept claims which include part of the following costs:
- Council tax.
- Home insurance.
- Mortgage interest.
Anyone who intends claiming anything not on this list will probably find the claim under attack from any HMRC enquiry they receive. Unless the room being used has an unusually large floor area, it is recommended not to claim that it takes up more than 20% of the total of the house. The HMRC examples don’t go above 10%, but they will accept claims based on the number of rooms in the house – if you have 6 rooms (excluding halls, bathrooms and toilets) that is 16.7% for the room in use by the business.
A Detailed Calculation
First, assess the proportion of the house taken up by the room in question. Using the “number of rooms” approach often gives a slightly higher %. Let’s assume we have a house which has 4 bedrooms, kitchen, bathroom, hall, living room, dining room, and toilet. One bedroom is being used as a home office. For the calculation we’ll only include the 4 bedrooms, living room, kichen and dining room. So the proportion to use is 1/7 for area.
Next, assess the time the room is in use. Suppose we have an e-bay trader using the room an average of 9 hours per day, and that an average of 2 hours per day it is used for surfing the net. The proportion to use is 9/11 for time.
The trader has a dedicated business phone line claimed separately. The annual costs are:
- Council tax (£1,600)
- Home insurance (£400)
- Mortgage interest (£1,800)
- Electricity (£1,000)
- Gas (£700)
Claimable Expenditure = £5,500 x 1/7 x 9/11 = £643
So in this example the trader will claim expenditure of £493 more than the “lazy option” £3 per week. If the trader is in the 40% tax bracket, that amounts to £197 less tax every year the business operates.
General Household Costs
The HMRC website helpfully gives an example of a self-employed person having her whole house exterior painted, and states that she is allowed to claim the business element of this. This is a “general household cost” which the room in use by the business derives some benefit from.
So costs such as cleaners employed, window cleaning, re-roofing should be allowable in the same way.
Never Claim for 100% Time Usage
So far this note has dealt purely with income tax. But the self-employed need to be careful what they claim back on the use of their house to avoid receiving a hefty Capital Gains Tax (CGT) Bill when they sell their house. This is because business property is chargeable to CGT, whereas a property which is the sole or main residence of a taxpayer is not.
Anyone who makes an excessive claim – or who claims that all or part of the house is used 100% of the time for business – is running the risk that HMRC deems all or part of the house to be business property and hence chargeable to CGT when it is sold. Currently the top CGT rate is 28% of the profit on sale but it has been much higher than this in the past.