There are two ways to do this:
1. Flat Rate Method
The Flat Rate method is simply based on a standard weekly allowance.
Using the Flat Rate method, business owners will be entitled to claim £6.00 per week.
Benefits
- No receipts are required
- No back office administration required
2. Receipt Method
By following the Receipt Method, business owners may be entitled to claim more than the standard flat rate allowance.
Example business costs are:
- Business Broadband & Telephone costs
- Office Equipment
- Rent and council tax charges applicable to the work area
- Utility charges applicable to the work area
Broadband/Telephone Costs
A small portion of household broadband costs may be claimed if an existing line has been upgraded for business use. The amount claimed would be the difference between the old and the new line rental cost.
Important – business owners will need to prove that a broadband system has actually been upgraded. Without evidence, HMRC will state that the broadband was already in place within the general home office environment and will disallow any un-receipted claim.
If using a home telephone for business calls, all relevant call charges can be claimed. An itemised bill, with all relevant calls highlighted on it will be required to support claims.
If a dedicated business broadband system has been installed (i.e. in addition to an existing home broadband), business owners are entitled to claim full installation and subsequent line rental costs.
If a dedicated business telephone line has been installed, business owners are entitled to claim for full installation and subsequent line rental / call charges.
Office Equipment
If business owners have a dedicated office space within their home, it will be reasonable for them to purchase computer equipment, office furniture and relevant stationery items.
Receipts will be required to support all purchases.
Important – all equipment must only be used for business purposes. Any personal use would indicate that the business owner is in receipt of a Benefit in Kind (BIK) and would mean they incur a personal tax liability.
Office Rental
Business owners may be able to claim for the cost of renting a room within their home to their business.
To achieve this, a formal rental agreement must be drawn up on the following basis:
- The rental cost must be realistic in terms of commercial value
- There must be a room within the house dedicated to the business
- The rental agreement must be signed by the homeowner and the business
- A periodic review (i.e. annual rent review) should take place.
Rental income (minus proportional expenditure) received by the homeowner must be included within their annual self-assessment tax returns. Proportional costs may include items such as mortgage interest payments, utilities and council tax.
Important Note – Renting a room out for business purpose could affect the principal private residence relief (PPR) that is available on residential properties. Selling a home is currently Capital Gains Tax free because of PPR. However, one of the conditions for claiming PPR relief is that “no part of your home has been used exclusively for business purposes during your period of ownership”. If a room has been rented for business purposes only partial PPR relief, at best, can be claimed.
Given the tax complications surrounding home office rental, Champion Contractors generally advise clients against this activity.
The Calculations
When considering a rental figure it would be practical to calculate the actual value of monthly household outgoings and then divide that number by the percentage of rooms being used for business purposes (usually be one room).
Core information includes:
- Annual outgoings (mortgage interest, utilities and council tax)
- Total number of rooms in the property (including bedrooms & bathrooms)
- Number of rooms being used as a home office
- Number of hours per day spent working from home office
- Number of days per week spent working from home
Annual outgoings should be divided by 52 week to provide a 1/52 eligible weekly expense.
In a house with seven rooms (one used as an office), the annual outgoings value would be 1/7 of the eligible expense. We would then call this the Eligible Amount.
If an office was in use for on average of eight hours per day, the actual expense would be 8/24 of the Eligible Amount multiplied by the number of days the home office was used every week – this is the figure used for proportional expenditure.
Benefits
- It is likely that business owners will claim a higher level of tax relief using the Receipts Method
Drawbacks
- Receipts must be obtained for every item of expenditure
- Frequent calculations will need to be made to ensure that business owners claim the correct relief
- More administration to be undertaken by the business owner