What are allowable expenses when using the home as office space to work?
Depending on the work you do, you might be able to claim expenses back for using your home as an office, either by claiming for office equipment like computers and furniture or even renting part of your home to your company.
This article provides an explanation of HMRC’s detailed provisions applying to the deductibility of such expenses, and highlights some of the pitfalls taxpayers should consider when calculating their expenses.
Personal or business use?
When claiming expenses for working from home, the primary threshold for allowable expenses remains whether the use is ‘wholly, necessarily and exclusively’ for the business. This applies to a self-employed, a director, or an employee, as it is included both in the legislation applicable to the self-employed and that applying to employees.
In practice, however, various costs incurred may in fact serve both a business and a private purpose. Should these costs be approportioned or excluded altogether? Are those costs treated in the same way by a sole trader, an employee and a director?
The legislation underpinning the deductibility of expenses associated with working from home for the self-employed is s34 of the Income Tax Trading and Other Income Act 2005 legislation, which can be summarised as follows:
- Expenses incurred wholly, necessarily and exclusively for the purposes of the business can be claimed in full.
- Expenses incurred solely for private purposes or for purposes incidental to business (so mostly private) cannot be claimed at all.
- Expenses incurred for a dual purpose (both business and private) can only be claimed if it is possible to identify a specific part used for business. If it is impossible to identify and measure the proportion of the cost incurred which relates only to business, no amounts can be claimed.
For example, the cost of smart business attire cannot be claimed against tax, as it is impossible to separate the business use from the private use of clothing. Whilst smart office clothes serve a business purpose, their private purpose (clothes are seen to be used for warmth and decency) is primary, ever-present, constant and simultaneous to the business purpose. It is not possible to separate the two, so condition 3 above is not met.
On the other hand, costs of computer repairs carried out on equipment used for eight hours a day by a sole trader to build websites for clients, and two hours in the evening to watch movies in private time, can be time-approportioned and the business part deducted for tax purposes, as condition 3 is satisfied.
The following are examples of costs usually expected to be approportioned, before being deducted for tax purposes:
- rent if home is rented, or mortgage interest if owned
- council tax
- water rates, only if metered
- light and heat
- telephone line rental, internet, and cost of calls
- home insurance
- house repairs
- business equipment repairs
- revenue expenditure in connection with converting part of home into office
- capital allowances for tools in connection with the above
- capital allowances for business equipment and business fixtures and fittings.
HMRC rules over what you can claim expenses for are complex and are different for limited companies and sole traders.
Self-employed claiming home office expenses
If you are a sole trader you use a room in your home as office space for running your business, you may be entitled to claim certain costs as a business expense.
You must be able to prove that you regularly spend time doing your job in this office space, so you can’t just use your home office for a small bit of administration while the majority of your work is done on-site or at client offices.
You can do this by either choosing to claim simplified expenses for the self-employed or you can work out your actual costs by calculating the proportion of personal and business use for your home, eg. the proportion of utility bill expenses incurred by your business.
Simplified expenses for the self-employed mean you claim a flat rate for your allowable expenses based on the number of hours you work from home each month. You’ll need to work a minimum of 25 hours a month from home to qualify. If you use simplified expenses, then don’t forget you can also claim the business proportion of your telephone or internet expenses as these are not included in the flat rate allowance.
- 25 to 50 hours of business use per month = £10 flat rate per month
- 51 to 100 hours of business use per month = £18 flat rate per month
- 101 and more hours of business use per month = £26 flat rate per month
Approportioning a private expense in a sole trader’s tax accounts does not mean that the business incurs a liability that will be discharged by refunding cash. There is no separation between the sole trade and the individual running the trade, in the same way the director as an individual and his company are separate. A sole trader therefore can deduct rent in proportion to their home used as business premises, but cannot charge and refund themself rent.
Purchases of equipment that’s necessary and essential for your professional duties will receive tax relief. You may also claim reasonable relief towards the cost of equipping/furnishing an office (for example chairs or bookcases).
How much can I claim as expenses through my limited company when working from home?
If you are a limited company, then there are two ways of working out your home office expenses – using HMRC’s flat rate amount or creating a rental agreement between you and your limited company.
HMRC flat rate for limited companies
The easiest way to calculate your home office expenses is to use HMRC’s published allowance for the additional costs of running your business from home. You do not need receipts to prove your expenses and you can claim £6 per week, which is an allowance of £312 for the 2020/21 tax year (the figure was £4 a week in 2019/20 or £208 per year). This can be included as an allowable expense alongside anything else you are claiming.
The other good news is that HMRC doesn’t treat this as a ‘benefit in kind’, which means you won’t have any tax to pay on the amount through your Self Assessment.
Renting your home office to your business
If you’re running a limited company, you might be able to rent your personal workspace in your home to your limited company and claim that as an expense. So, as long as you run your business through your limited company, and follow the rules correctly, you may be able to claim more than £312 each year.
To claim a higher amount, you’ll need to set up a rental agreement between you (as the homeowner) and your limited company. If you do not have this formal agreement in place then you run the risk of HMRC classifying the rent you receive from your limited company as additional salary (from your limited company) which would be subject to Tax and National Insurance.
Drawing up a rental agreement is beneficial because your limited company can deduct rental payments from your company’s pre-tax profit, meaning that Corporation Tax will not be payable on these expenses.
When you prepare your rental agreement, you need to keep the following in mind:
- The amount of rent needs to be realistic in terms of commercial value and must be on an ‘arm’s length’ basis. This means that neither party should be disadvantaged by the agreement. So you cannot calculate an amount of rent designed to benefit you as the individual owning your home or to affect the profitability of your limited company
- You should not usually have a room in your home solely dedicated to your business as it can have additional implications when you come to sell your house
- A formal rental agreement must be in place and signed on behalf of both parties
- You should consider periodic reviews of the amount of rent paid (for instance an annual review).
- Any income you receive as an individual must be included on your personal tax return (Self Assessment) and any profit remaining after expenses will be subject to income tax at your normal rate, which may make this a less tax-efficient option for you personally.
Your rental agreement can be used to cover the proportional costs of the rented space. There is no definitive list of allowable expenses – what is allowable depends on the facts in each case. But you can include items such as mortgage payments, utilities and council tax based on the proportion of the property used for business purposes.
How to calculate your allowable rental expenses
When it comes to ensuring a reasonable amount of rent, you need to calculate how much space is used by your business. A practical way to do this is to calculate your monthly outgoings for expenses you are looking to claim, then divide that by the percentage of your rooms being used for business purposes (which should usually be one room).
For example, if you have a house with seven rooms, an office should take up one room, so you calculate the amount of rent based on 1/7th of the eligible expenses. If your office was in use on average seven hours a day you would then calculate 7/24th of the amount, and this is what you would include in the agreement as the rent amount.
However, if you decide to sell your property you may need to pay Capital Gains Tax which needs to be included on your Self Assessment. This is because the ‘business’ part of the sale will not qualify for Private Residence Tax Relief. This is due to your home no longer being fully exempt because an area is being used for business purposes. Capital Gains Tax is applied to any increase in the value of the office area that may have resulted from the company’s occupation of it.
This means that you need to think very carefully about whether a rental agreement is the right decision for you. If you decide to sell your house, you could face a Capital Gains Tax bill on the office part as this will not be covered by the Private Residence Relief.
The calculation for this can be complicated and the Capital Gains Tax liability could be reduced if the office is used by you for non-business use outside office hours. It’s likely you will need specialist advice to calculate the amount of Capital Gains Tax you owe to ensure you follow HMRC’s rules.
Claiming for multiple rooms?
You will need to provide a very good reason for using more than one room for business purposes and evidence that the private use of this space is secondary to the business use. A legitimate situation might be a photography studio with an office and a dark room – remember that if you sell the property, Capital Gains Tax may be payable.
If you do use multiple rooms for business purposes then you should prepare a detailed calculation with supporting evidence. This should follow the process highlighted above. You may even go further and apportion expenses based on the square metres in use.
You may also claim back repairs on your property if they are directly related to, and necessary for, your business.
Use of the Internet when working from home
In order for expenses to fall within the “wholly and necessarily” rules, the internet connection must be purchased in the name of your limited company. You normally can’t claim any internet costs as this will include personal use. However, if you work at home and have a rental agreement with your business, this expense can be part of the rental calculation.
The exception to this is if there is a separate broadband line that runs into the office part of your home to provide internet access solely to that area – only then can you claim all of the internet costs for the separate line.
How do I claim for business mobile telephone calls?
To claim full relief on your mobile telephone bills, you’ll need to ensure that a contract is set up between your company and the service provider. This way you can gain full tax relief on the cost of the phone and its use. Any personal calls on the mobile are treated as a tax-free benefit in kind, so are a consequence of an allowable business expense and will encounter no tax – or need reporting on your P11D.
If you take out a mobile phone contract in the name of your business, the monthly bill is treated as business expenses. If the entire balance of a mobile phone and its contract is £1,000, this would be recorded as an allowable expense in your accounts. Your taxable profit would reduce and the amount of Corporation Tax you pay would reduce by £190 (for the 2019/20 and 2020/21 tax years). If you’re a sole trader rather than a limited company then it would reduce your sole trade profits and therefore your personal tax bill. The personal use of the phone is a tax-free benefit in kind, so you won’t be taxed through your Self Assessment.
The one caveat with signing a phone contract in the name of your company is that you’ll probably have to use one of your phone provider’s business tariffs, which may prove slightly more expensive – but any increase in cost will probably be covered by the tax savings.
We don’t recommend claiming for business use on a personal mobile contract as none of the tariff can be claimed on the basis of paying for minutes, because these minutes are usually included within the contract and have no identifiable cost.
Claiming expenses for working from home if you are an employee
You don’t have to be self-employed or run your own business to work from home. Many employees work from home at least some of the time – indeed the Coronavirus pandemic has seen this increase dramatically. You are still able to claim the £6 per week (£26 a month) to cover your additional costs if you have to work from home, either from your employer (provided they are willing to pay you) or directly from HMRC.
For previous tax years, the rate is £4 a week (£18 a month). You will not need to keep any records.
If you’ve agreed with your employer to work at home voluntarily, or you choose to work at home, you cannot claim tax relief on the bills you have to pay.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.