If you use a room in your home as office space for running your business, then there are two ways of claiming your costs – one of which is relatively simple, and the other of which is more complex.

The Simple Option – Flat Rate Claim

This is the easiest way to claim for your ‘home as office’ expenditure and is based on HMRC’s own allowances for the additional costs of doing business from your home. You do not need receipts to prove your expenditure and you can claim £4 per week, £18 per month or £216 per year. This can be included as an expense alongside anything else you are claiming, so long as your annual claim does not exceed the £216 limit.

The Complex Option – Rental Agreement

If you are operating through a limited company then you may be able to claim for more than the £216 limit allowed under the flat rate system. In order to claim a higher sum, you will need to set up a rental agreement between your company and yourself as an individual. If you do not have this formal agreement set up then you run the risk of HMRC classifying the rent as an additional salary which would be subject to tax and National Insurance at the normal rate.

Organising your home office in this way can be beneficial as your company can deduct the cost of rental payments from their pre-tax profits, meaning that Corporation Tax would not be payable on those amounts. However, it is important to consider some other aspects of operating in this way:

  • Your rental figures should be realistic in terms of commercial value, and should be kept at an ‘arm’s length’ basis, meaning that both parties should benefit from the arrangement 
  • You should have a room dedicated to your business
  • A formal rental agreement must be in place
  • It is worth considering periodic independent rental evaluations 
  • Any rental income that you receive must be included on your personal tax return and any profit remaining after expenses have been deducted will be subject to tax, which might make it a less tax efficient option than it would otherwise appear
  • Any rental agreement could affect your Private Resident’s Relief, as explained below

If you want an idea of the ‘going rate’ for offices in your area, then you can do a search for serviced offices to see what the commercial costs are. They are usually based on the square footage available and additional charges for things such as insurance and rates and this will help you to obtain an appropriate rental figure.

Private Residence Relief

If you choose to sell your home, then you will need to ensure that you do not lose your Private Residence Relief. In order to protect your PRR, your agreement will need to state that the availability of the room is only based on specified periods during each week or month, such as between 9am and 5pm, Monday to Friday. However, HMRC could decide that the office is used for business purposes and disallow a portion of your PRR claim when your home is sold. 

Office Furniture

When purchasing office furniture such as a computer desk, filing cabinet or chair, you should consider whether there will be any personal use of the item as this could have an impact on whether it is considered an allowable expense. If your private use of the item is insignificant, then you will need to be able to demonstrate this to the satisfaction of HMRC, although if the item cost is deemed reasonable, usually under £300, then it is unlikely that inclusion as a business expense would be questioned. 

 
If you are called upon to justify the usage of your furniture, then you will need to consider how much time you spend using the item for business purposes as well. For instance, if you have an item of furniture which you only use intermittently for work purposes, it will be difficult to prove that your personal use is less significant than your work use.
 

Home Telephone

If you make any phone calls from your home phone in the course of doing business, then these can be reclaimed as an allowable expense, but only the cost of business calls and no portion of the line rental if it is also used for personal calls. Many people find that the sums are so small and the time it takes to scour bills to reach a final figure means that it is not worth claiming for phone calls, but this will depend on the nature of your business.
In cases where your business needs justify having a second line installed purely for the purposes of making and receiving business calls, then the total cost of this line can be claimed. The line will need to be in the business’s name and with all bills being paid from the business bank account in order to demonstrate that it belongs solely to the business. 
HMRC’s criteria for a business needing a phone are:
 
  • A clear business need for an employer to provide an employee with a phone such as their role involving the making and taking of calls 
  • The employer must be taking reasonable steps to keep track of and reduce the costs of any private use through a clear policy which limits or prohibits personal calls
  • The provision of the phone to an employee is in no way considered a reward to the employee in question

Internet Access

You can claim the cost of your internet access at home so long as the following conditions are met:

  • There is no separate billing or record kept of access connections 
  • No distinction is possible between work and personal connections
  • Personal use is insignificant
  • The contract for provision of internet access is in the name of the business and paid from the business bank account

If you only have one internet connection at your home then you can claim for the business use of the service, but if there is no separate billing or log of usage which can determine between personal and business use then no claim will be allowable.

The phone line used to connect to the internet is considered separately to the contract for provision of internet access itself. If you wish to claim for the cost of the phone line then it will need to meet the criteria set out for claiming for a home telephone.

Mobile Phones

One mobile phone can be claimed for as a tax exempt expense and will not need to be declared on completion of the P11D form.
In order for a mobile phone to qualify for the exemption, there are certain criteria which must be met:

  • Only one phone is provided
  • Phones that are provided for the use of family or friends are not included
  • The contract for the phone is in the name of the company, and all associated costs are paid for from the business bank account

A contract that is not obtained in the company name, perhaps for admin reasons, but is still paid for through the business bank account, then this could still be tax exempt, although it would have to be declared on the P11D every year. You would still need to be able to prove to HMRC’s satisfaction that the contracts purpose was solely for business use and that no personal calls were made from that line, which could prove difficult.

You can claim for business calls from a personal mobile phone that is paid for from a personal account, but you cannot claim for rental costs or any personal usage.

The popularity of mobile phone deals which include ‘free’ minutes as part of a contract can make this complicated as you will need to be able to calculate the percentage of business calls that have been made, including those which were covered by any free minutes available. This is the percentage of costs above the basic line rental that can be claimed as expenses.

Example:

In the case of a package that costs £30 a month and includes 60 free minutes.
March’s bill is £30 with 50 minutes used in total, comprising 30 on personal calls and 20 on business calls. Because no additional costs have been incurred in the making of business calls, there is no claim to be made.

April’s bill is £40 with 100 minutes used in total, comprising 40 on personal calls and 60 on business calls. Because 60 per cent of the calls were business-related, 60 per cent (or £6.00) can be claimed from the additional £10 spent.

Computer Costs

A computer purchased by the company and made available for business use can be claimed as long as there is no significant personal usage (if there is, then this could be classed as a benefit in kind and taxed appropriately). 

If your company is using the Flat Rate VAT Scheme then VAT can only be claimed if the total is more than £2000 gross on any single invoice.

Computer Costs Under £500
A computer that costs less than £500 will generally be considered a revenue expense for the year in which it was purchased. 

Example
If a company issues £12,000 worth of invoices in a single year and purchases a laptop for a total of £250.

Income £12,000
Laptop (£250)
Pre-Tax Profit £11,750
Corporation Tax @ 20% £2,350
 Profit after Tax £9,400

Computer Costs over £500
A computer costing more than £500 will be ‘capitalised’ for the purposes of keeping accounts and the company will be entitled to Capital Allowances against the total. This is 100 per cent of the cost in the first year for the tax year 2015/16, up to a total of £500,000 per year.

 

Example
If a company issues £12,000 worth of invoices in a single year and purchases a laptop for a total of £750.

Income £12,000
Pre-Tax Profits £12,000
Capital Allowances (£750)
Taxable Profits £11,250
Corporation Tax @ 20 % £2,250
Profit after Tax £9,000

Computer Software

Software is usually classed as an expense for the year in which it was purchased, although exceptions are made if it is particularly expensive (more than £500) and is likely to be in use for more than two years.

 

Benefit in Kind

If there is a significant degree of personal use for a piece of computer equipment then it would be considered a benefit in kind, which would be calculated at 20 per cent of the market value from the time when it became available to the employee for their use. The company would be liable for 13.8 per cent Class 1a National Insurance Contributions and the employee would be liable for personal taxation at the basic, higher or additional rate depending on their earnings.

How can Nixon Williams Help?

Although HMRC does provide guidelines for how to claim expenses, many people find them hard to decipher and are unsure as to how to apply them to their situation. If you want to be absolutely confident that you are claiming everything you should be, and not claiming for anything you shouldn’t, then using an expert accountant with years of experience is an ideal way to save time and money. Call our friendly team today on 01253 362062 or email jacqui.fairbrother@nixonwilliams.com for details of our low-cost packages.