Working from home when Self-Employed – Tax Deductions

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Despite the COVID-19 pandemic, many consider a major benefit of self-employment to be working from home.  HMRC accept the majority of self-employed individuals will use at least part of their homes within their business and provide two alternative methods to calculate the tax deductible amounts related to home use.

HMRC’s two permitted methods

The first way is to use simplified business expenses. This involves looking at how many hours you spend working from home each week and deducting a flat rate from your taxes. Using simplified business expenses is easy and straightforward. However, the tax deduction itself is usually quite small. In addition, the flat rate doesn’t include telephone and internet costs. You’ll need to calculate these expenses separately.

The second method is called the actual costs method. As the name suggests, this involves calculating your home’s running costs, such as rent and utilities. Then, you’ll need to deduct the business proportion of those costs.  The actual costs method requires more effort. That said, depending on your circumstances, it could mean a larger use of home as office tax deduction.

The simplified business expenses method explained

This simple method is open to any self-employed individual who meets all of the following conditions:

  • You’re a sole trader or you’re in a partnership and all the other partners are individuals
  • You work from home more than 25 hours a month
  • You’re not VAT registered

The calculation method is very straightforward:

  • Step 1: Calculate how many hours you work each month
  • Step 2: Use HMRC’s simplified expenses table to find out your monthly flat rate.
  • Step 3: Multiply the flat rate by the number of months worked
  • Step 4: Calculate the business proportion of your telephone and internet costs by dividing your bill by the number of hours worked
Hours of business use per monthFlat rate per month
25 to 50£10
51 to 100£18
101 and up£26

Example

Jane worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:

10 months x £10 = £100

2 months x £18 = £36

Total Jane can claim = £136

Remember this is only a deductible expense so assuming a basic rate taxpayer (20%) who also is within the class 4 national insurance band (9%), this will reduce your liability by only £39.44! (£136 x 29%).

The actual home office costs method

Unfortunately, HMRC don’t have a formula or exact method for this. They simply say that you have to divide your costs between business and private use in a way that is “reasonable.”

The most common way to go about this is to divide your total expenses by the number of rooms you use for business. You then multiply this figure by the percentage of time you use the room for business.

Naturally HMRC require you to keep good records of your expenses because HMRC may also ask to see your records in order to make sure your claim is accurate.

When is a room not a room?

HMRC describes a room as a “normal living space.” Over the years both tax advisors and HMRC have come to the general conclusion that a kitchen, bathrooms and hallways do not count as rooms. This means only the living room, the bedrooms and the room you use as an office count as rooms for tax purposes.  You could claim a deduction on more than one room if they are used for business, for example a photographer could claim for a dark room and an office.

Don’t be caught out by the Capital Gains Tax trap

Even if you use a room mostly for business, it’s worth using it for personal reasons part of the time. For example, you could use it as an exercise room or hobby room. This is because, if part of your home is classed as exclusively a business space, you may have to pay capital gains tax on part of the capital gain when you sell it.  It is a complex area of the legislation.

Which expenses can be included in a claim?

HMRC allows you to deduct two types of costs: fixed costs and running costs.
Fixed costs include:

  • Either rent or mortgage interest on your mortgage (capital repayments are excluded)
  • Council Tax
  • Insurance (unless you have separate insurance for your business, in which case you can deduct the full cost)
  • Repairs and maintenance

Running costs include:

  • Heating, lighting and electricity
  • Water and sewerage
  • Phone and broadband
  • Cleaning

The calculation method is fairly straightforward:

  • Step 1: Total all of your above expenses for the year, from April 6 to April 5.
  • Step 2: Divide your total expenses for the tax year by the number of rooms in your house. Remember that the kitchen, bathrooms and hallways don’t count.
  • Step 3: Work out the business percentage of your use by dividing the number of hours worked by the total number of hours in the year (8760 hours in a standard year and 8784 hours in a leap year) and multiplying it by 100.
  • Step 4: Multiply the answer in step 2 by the percentage in step 3.

Example

Paolo is a technical author working from home. He uses his living room from 8am to 12am. During the evening, from 6pm until 10pm it is used by his family. The room used represents 10% of the area of the house. The fixed costs including cleaning, insurance, Council Tax and mortgage interest, etc total £6600. A tenth of the fixed establishment costs is £660. For the purposes of fixed costs, one sixth (4/24) of the use by time is for business, so Paolo claims £110.

He uses electricity for heating, lighting and to power his computer, which costs £1500 per annum. He considers an apportionment of these costs by time and area. A tenth of the costs are £150 and half of these costs by time (4/8) relate to business use, he claims £75. His itemised telephone bill shows that a third of the calls made are business calls. He can claim the cost of those calls plus a third of the standing charge.  He has a broadband internet connection which he uses for research purposes as well as for private use. Two thirds of the time spent online is for business purposes, so that two thirds of the monthly charge is allowable.

What about office equipment and supplies?

These do not form part of your use of home as office calculation.

HMRC considers office furniture and other equipment you need for work, such as a laptop, to be plant and machinery. This qualifies for the annual investment allowance. This means you can deduct the full amount you paid for it from your taxes, less any personal use, up to a limit of £25,000 per year.

On the other hand, office supplies such as pens, pencils, envelopes and other stationery are a business expense.  You’ll need to prove that you used them “wholly and exclusively” for business purposes.

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.







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