Many company directors perform a lot of work from home. HMRC offer three possibilities for directors to recoup at least some of the expenditure that this entails.
Flat rate scheme
Currently, HMRC allows a flat £6 per week fixed expense (£26 per month) which does not include business telephone calls, which can be claimed back from the company, without the need for any receipts.
Obviously, this is merely a nominal amount, and will not cover even a fraction of the costs incurred by limited company directors who use their home as a workplace in a significant way.
Claiming a percentage of household expenditure
As an alternative to the fixed rate scheme, directors can get tax relief for a limited number of other expenses, as long as they are not for services already being provided for personal use, or for dual purpose (such as a broadband line shared by the household as well as the business). Directors can also claim for the extra costs of lighting and heating the office workplace, for example, as well as business phone calls and a dedicated business broadband service.
In order to establish the proportion of household costs used by the business, directors will need to work out the percentage of their property which is used for business purposes, what proportion of a utility bill that can be apportioned to business use (e.g. lighting or heating), and for how long each day the service is used for solely business reasons (for example, the business area only needs to have lighting for 50% of the day).
Directors cannot claim back any proportion of rent, mortgage interest, or council tax from their companies – as HMRC’s view is that these costs would have been paid personally anyway.
Rental agreement with the director’s company
In theory, limited company directors can charge the company ‘rent’ as a proportion of the rent or mortgage interest paid by the household. A formal rental licence agreement would need to exist to cover this rental agreement.
This must be a commercial agreement, based on the real working arrangements, and no more than a ‘market rent’ must be charged. It may be worthwhile asking a local estate agent to provide a formal rent valuation.
The company will be able to deduct rental payments from Corporation Tax, but the director will incur an income tax liability on the rent received. If s/he co-owns their home, the rental income must be split according to the proportion of the property each co-owner owns.
There are some additional issues which a director should clarify before deciding to sign a licence with their company:
- If they have a rental agreement or a mortgage, are they permitted to use their home for business purposes?
- Would running a business from home breach the terms of their home insurance policy?
- There is also a small chance that their property may become liable for business rates in certain circumstances.
Even if the director uses a room mostly for business, it’s worth using it for personal reasons part of the time. For example, they could use it as an exercise room or hobby room. This is because, if part of their home is classed as a business space, they may have to pay capital gains tax on part of the capital gain when they sell it. It is a complex area of the legislation.
Using a caravan as an office
If a director wants to purchase through their company a caravan and base it within their garden or on their drive to be used an office in addition to the main house, then they will usually not need planning permission unless they live in a conservation area.
HMRC’s position is that if the caravan is regularly moved as part of the trade activity, then it is plant and capital allowances are available. If it is fixed, then it is not, and they are not. The purchase is likewise not an expense for Corporation Tax as it fails the wholly and exclusively test since HMRC would argue a duality of purpose in that the caravan could be used to go on a holiday. Likewise, VAT would not be recoverable. Expenses that are clearly business related such as IT connections and insurance should, however, be allowable for Corporation Tax.
Flat rate scheme
Currently, HMRC allows a flat £6 per week fixed expense (£26 per month) which does not include business telephone calls, which can be claimed back from the company, without the need for any receipts.
Obviously, this is merely a nominal amount, and will not cover even a fraction of the costs incurred by limited company directors who use their home as a workplace in a significant way.
Claiming a percentage of household expenditure
As an alternative to the fixed rate scheme, directors can get tax relief for a limited number of other expenses, as long as they are not for services already being provided for personal use, or for dual purpose (such as a broadband line shared by the household as well as the business). Directors can also claim for the extra costs of lighting and heating the office workplace, for example, as well as business phone calls and a dedicated business broadband service.
In order to establish the proportion of household costs used by the business, directors will need to work out the percentage of their property which is used for business purposes, what proportion of a utility bill that can be apportioned to business use (e.g. lighting or heating), and for how long each day the service is used for solely business reasons (for example, the business area only needs to have lighting for 50% of the day).
Directors cannot claim back any proportion of rent, mortgage interest, or council tax from their companies – as HMRC’s view is that these costs would have been paid personally anyway.
Rental agreement with the director’s company
In theory, limited company directors can charge the company ‘rent’ as a proportion of the rent or mortgage interest paid by the household. A formal rental licence agreement would need to exist to cover this rental agreement.
This must be a commercial agreement, based on the real working arrangements, and no more than a ‘market rent’ must be charged. It may be worthwhile asking a local estate agent to provide a formal rent valuation.
The company will be able to deduct rental payments from Corporation Tax, but the director will incur an income tax liability on the rent received. If s/he co-owns their home, the rental income must be split according to the proportion of the property each co-owner owns.
There are some additional issues which a director should clarify before deciding to sign a licence with their company:
- If they have a rental agreement or a mortgage, are they permitted to use their home for business purposes?
- Would running a business from home breach the terms of their home insurance policy?
- There is also a small chance that their property may become liable for business rates in certain circumstances.
Even if the director uses a room mostly for business, it’s worth using it for personal reasons part of the time. For example, they could use it as an exercise room or hobby room. This is because, if part of their home is classed as a business space, they may have to pay capital gains tax on part of the capital gain when they sell it. It is a complex area of the legislation.
Using a caravan as an office
If a director wants to purchase through their company a caravan and base it within their garden or on their drive to be used an office in addition to the main house, then they will usually not need planning permission unless they live in a conservation area.
HMRC’s position is that if the caravan is regularly moved as part of the trade activity, then it is plant and capital allowances are available. If it is fixed, then it is not, and they are not. The purchase is likewise not an expense for Corporation Tax as it fails the wholly and exclusively test since HMRC would argue a duality of purpose in that the caravan could be used to go on a holiday. Likewise, VAT would not be recoverable. Expenses that are clearly business related such as IT connections and insurance should, however, be allowable for Corporation Tax.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk or speak with an account manager to get any process started.
