The COVID-19 lockdown has resulted in many self-employed individuals working from home a lot more. There are, of course, many who are struggling to maintain their income, but we thought it would be useful if we set out the tax relief on expenses you may be entitled to when your self-assessment tax returns are submitted ...
Nor does it mean part of the home must be permanently used for business purposes and not used for any other purpose at any other time. However, it does mean that when part of the home is being used for the business, that is the sole use for that part, at that time.
So, what costs are allowed? The courts have allowed the apportioning of household expenses and there is often more than one method of arriving at a reasonable apportionment such as 'apportionment by area' may be adequately considered by reference to the number of rooms in use, but in an open-plan environment a calculation by reference to floor area may be necessary.
The factors to be taken into account when apportioning an expense include:
- Area: what proportion, in terms of area of the home, is used for business purposes?
- Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
- Time: how long is it used for business purposes, as compared to any other use?
In relation to specific costs, HMRC accepts that a reasonable proportion of the following is allowable:
- Insurance: if the business use is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed. Otherwise, an appropriate part of the premium can be allowed.
- Council Tax: it may be allowable where other property-based expenses are deductible.
- Mortgage interest: if part of the home is used solely for business then an appropriate part of the mortgage interest is an allowable deduction.
- Repairs and maintenance: a proportion of the cost of general household repairs and maintenance is allowable in line with the proportion that the house is used solely for the business e.g. general redecoration of the exterior or repairs to the roof. If a room is used solely for business purposes then the cost of redecorating that room is wholly allowable.
- Running costs: where there is only minor business use of the home e.g. writing up business records, HMRC will accept a claim based on any reasonable basis. Where there is significant business use it is appropriate to apportion such expenses by reference to the facts of that usage.
- Telephone: the cost of business calls is allowable, as is a proportion of the line rental (based on the ratio of business use to total use). Similar rules apply to broadband.
As an example, I usually work from business premises and meets my clients face-to-face. During COVID-19, I've been operating and managing the business from home. I use the spare bedroom in which there are a desk and computer. The room is solely used as my office between 8am and 6pm daily. The room is available for domestic use outside of business hours and my family regularly make use of the room for around 2 hours each evening.
After apportioning costs by reference to the number of rooms in the house, I calculate the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time, I claim for 10/12 of the costs (10 in use for work and 12 hours total use of the room). The total claim is £750. I believe the claim of 83% of the total costs attributable to the room is a reasonable basis for future claims, should my circumstances remain unchanged.
However, it would be tempting to conclude that it would be better to have no 'non-business use' of the room as relief could be claimed for 100% of the apportioned costs. That could result in a Capital Gains Tax liability if the house is sold. Principal Private Residence relief would not be available on the gain apportioned to the office.
Post COVID-19, I may resume working from our business premises, but may well conclude that I can operate the business very well from home and change my working arrangements.
The calculations above do require some time to be spent analysing actual costs. As a simpler alternative. The tax rules allow a fixed rate claim instead of actual costs which is the total of the allowable amounts below for each month, or part of a month, falling within the period, where the number of hours worked in a month (or part) is the number of hours spent wholly and exclusively on work done by the person, or any employee of the person, in the person's home wholly and exclusively for the purposes of the trade.
Goodness, don't HMRC like long sentences? In essence, that means for those working 25 or more hours from home, they can claim £10 per month. Working 51 or more hours gives you a claim of £18 per month and 101 hours or more (which I feel is pretty impossible to do!) gives a £26 per month claim.
The rules mean that reasonable claims for the costs of working from home may be made.
If you feel inspired to find out more about anything I've said here, do call me on 01908 774320 or leave a comment below and I'll be in touch as soon as I can.