Allowable expenses at home
The COVID-19 lockdown has resulted in many individuals working much more from home. 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 claim for.
The tax rules
The legislation which applies to the self-employed states that an expense is only allowable as a deduction if it is incurred ‘wholly and exclusively for the purposes of the trade or profession’.
If an expense is incurred for more than one purpose, the rules allow a deduction for any proportion of the expense which is incurred wholly and exclusively for the purposes of the trade or profession.
Wholly and exclusively does not mean that business expenditure must be separately billed or 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 then that is the sole use for that part at that time.
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 e.g. 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 accept that a reasonable proportion of the following are allowable:
Insurance – an appropriate part of the premium can be allowed.
Council Tax – it may be allowable where other property based expenses are deductible.
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 (light, heat, power) – 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.
Use of home: example
Mark usually works from business premises and serves customers face to face. During COVID-19 he is operating his business online and managing it from home. He is using the spare bedroom in which there is a desk and computer. The room is solely used as his office between 9am and 5pm daily.
The room is available for domestic use outside of business hours and his 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, Mark calculates the room uses £300 of variable costs (electric and gas) and £600 of fixed costs (council tax, insurance). In apportioning these costs by time Mark claims for 8/10 of the costs (8 hours in use for work and 10 hours total use of the room). The total claim is £720.
The claim of 80% of the total costs attributable to the room is seen by Mark as a reasonable basis for future claims, should his circumstances remain unchanged.
It should be noted that the £720 claim is for annual costs. Post COVID-19 he may resume working from business premises but he may well conclude that he can operate his business very well from home and change his working arrangements.
Fixed rate deduction
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.
From 6 April 2020 HMRC allow £6 a week (£26 a month) to cover your additional costs if you have to work from home. For previous tax years the rate was £4 a week (£18 a month). You will not need to keep any records.
How we can help
If you need support or further information regarding home-working costs, please contact Esther Guy on 01737 652 852.