How to reduce your tax bill: Expenses claims for home working
Working at home is becoming commonplace, both for the employed and the self-employed worker. New guidance has emerged from HMRC to help self-employed people who work from home claim business expenses, especially if they work from their own primary residence for a substantial portion of their working time. Paul Webb from the small business tax experts, Robert James Partnership, explains how this legislation works and what business owners can do to claim their full entitlements.
Who does the guidance apply to?
The first thing which should be understood is that this new guidance only relates to self-employed individuals, i.e. sole traders and partnerships. It doesn’t apply, for example, to a company director working from/at home, or an employee who is required to carry out work for an employer from home. In these instances, separate regulations for home working expenses continue to apply as they always have.
What are the new 'fixed costs'?
HMRC has introduced the concept of fixed costs as part of its attempt to clarify the law. Historically, if you rented a property as a residence and you worked from home, a proportion of the rent was an easily identifiable expense for you to claim. Whereas if you bought a property and had a mortgage, you had mortgage interest, council tax, insurance and a number of other costs and there was never any clear guidance as to what to do in those situations regarding claiming an element of these fixed overheads as expenses.
So, this new concept of fixed costs covers items such as mortgage interest, council tax, insurance premiums on the property, etc. and HMRC has said that a certain percentage of these costs can be offset against the income of the business provided certain prescribed conditions are met.
These fixed costs are those costs required to run the home; they are not additional costs, such as consumables (light and heat, power, etc). These latter costs are dealt with separately and a proportion of these can already be offset against turnover as expenses.
How is a home office defined?
In order to make a claim for fixed costs you need to meet certain conditions, of which having a specific office area in the home is the key. HMRC will be looking for visible evidence that you are actually working from home. So having an area set aside with a desk, a chair – a fixed workstation if you like – rather than just sitting at your kitchen table with a laptop, is an important factor. It is also key to be able to demonstrate that you are working from this area for a considerable length of time – i.e. nine to five daily or a reasonable proportion of time in relation to the overall business turnover.
Is there a future Capital Gains Tax issue?
Historically if you had a room solely dedicated for business use HMRC were happy to allow the costs related to that room as a deduction against profits. But if you ever came to sell your house, then a proportion of the gain as it related to that room would actually be chargeable to capital gains tax and would not benefit from the Principal Private Residence Relief that was available for the rest of the property.
This new guidance also covers situations where you do not have a dedicated room for business purposes that you claim expenses for. For instance, your home office is used for business purposes but also for private reasons, for example the family use the internet in the evening or you do your personal accounts there. In this situation you now no longer have to worry about possible future capital gains tax issues and in addition, the revenue is allowing you to benefit from the full income tax deduction as well.
How should you apportion costs?
Previously as there were no hard and fast guidelines on this it was always difficult to calculate the deduction and potentially left a client open to an enquiry. The new guidance has been very much welcomed by tax professionals because it provides certainty for all self-employed business people and tax advisors alike to know what expenses can definitively be included in a claim.
Obviously you need to examine your claim and ensure that it is "reasonable in relation to the business". This means that if you have a business where you are out and about visiting clients and only doing a very small proportion of your work at home then obviously the allowances that you can claim will be reduced by that fact. In contrast if you are working seven hours a day from home then, of course, your claim is going to be correspondingly larger because you are spending a large proportion of your time working from home.
It is important that the claim does fit the type and nature of the business and the actual use of the home office facilities. The revenue has said openly on its website that they are only likely to launch an enquiry where the amount claimed is significant or is inconsistent with the taxpayer’s business.
How do I avoid being investigated by HMRC?
In the past claims for expenses has always been an area rife with enquiry. In some cases I have worked on, an enquiry has been opened for even very small sums of money under dispute by HMRC. But now, providing that business owners are complying with these published guidelines – and that resultant claims are in keeping with the size and nature of the taxpayer’s business – it is unlikely that the revenue will investigate. Because this has historically been such a grey area, expenses claims have typically been submitted with great caution, but now, with clear guidance available, there is likely to be an increase in claims from self-employed people working at home for costs incurred which will obviously be of benefit to them.
What should I do about record keeping?
Although HMRC may have stated they are unlikely to pursue an expenses claim provided it is consistent and in keeping with the size and nature of the business, record keeping is an area that warrants a fine attention to detail. It is very important that business owners keep good, detailed records with all the information on their fixed costs available for tax advisors and the HMRC to examine. Hold onto council tax bills and home insurance bills for example because any claims will need to be justified and backed up with sound evidence in case of a revenue enquiry into the taxpayer’s affairs.
Key points to note for the self employed working from home:
- New HMRC guidance provides a definition of fixed costs and makes it more straightforward to claim for expenses when working from home
- It applies to sole traders and partnerships only – not limited companies or employees
- A significant portion of the working time must be spent in a home office, which must be a designated area (but can be a shared space for a small amount of time)
- Keep detailed records of all bills and expenses to ensure you are protected in the unlikely event of an enquiry.
Paul Webb is a tax partner at small business tax experts Robert James Partnership.
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AccountingWEB.co.uk - 24-Sep-2008
Categories: Money matters
Story read: 3351
Number of comments: 1
Any links?
sheila , 2-Oct-2008
Found this very interesting as I have always steered cients away from the claims for % of mortgage/counail tax etc, just sticking to gas and elec on square footage or flat rate.
Is there a link to the "fixed costs" in the HMRC website? I've had a look, but can't seem to find any reference to this change on the website....but then I could be looking in the wrong place!
Many thanks
