One of the benefits of contracting is the ability to work from home but this can become costly as you will need to furnish your workplace. If you use a room in your home as office space for running your business, you may be entitled to claim the cost back as a business expense. 

There are two ways of claiming this back: flat rate claims and rental agreements. This guide will explain how to use your home as an office allowance. 

Flat Rate Claim

This is the easiest way of claiming for your home as an office expenditure and is based on HMRC’s own allowances for the additional costs of doing business from 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 a claimable expense alongside anything else you are claiming as long as your annual claim does not exceed £216.

Rental Agreement

If you are contracting through a limited company, you may be able to claim more than £216. To claim a higher allowance, you will need to set up a rental agreement between your limited 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 it means that your company can deduct the cost of rental payments from their pre-tax profit, meaning that Corporation Tax will not be payable on these accounts. 

However, it is important to consider some of these aspects of operating:

•Your rental figures should be realistic in terms of commercial value and should be kept at an ‘arm’s length’ basis. This means that both parties should benefit from the agreement

•You should have a room dedicated to your business

•A formal rental agreement must be in place

•You should consider periodic independent rental evaluations

•Any 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 may make this a less tax efficient option 

What can I claim expenses for?

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.

However, if the item cost is deemed reasonable then it is unlikely that inclusion as a business expense would be questioned. This amount usually falls under around £300. 

If you are called upon to justify the usage of your furniture by HMRC, you will need to consider how much time you spend using the item for business purposes. For example, if you have a piece of office furniture which you use only intermittently for work purposes, it would be difficult to prove that your personal use is less significant than your work use. 

Landline and mobile 

If you make any phone calls from either your landline or mobile phone during the course of doing business, these can be reclaimed as an allowable expense. However, if your landline has also been used for personal calls, no portion of the line rental cost can be reclaimed. 

In instances where you need a second line to be installed for the sole purpose of making and receiving business calls, the total cost of this line can be reclaimed. The line will need to be installed under the business name and all bills need to be 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 as follows:

•A clear business need for an employer to provide an employee with a phone 

•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 is not considered a reward to the employee in question

Internet 

You can claim for the cost of your internet access in your home office as 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 in your home, you can claim for the business use of this service. If there is no separate billing or log of usage which can determine between personal and business use, 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, it will need to meet the criteria established for claiming for a home telephone.

Computer costs

Computer 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.

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.

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.

Benefit in kind

If there is a significant degree of personal use for a piece of computer equipment, it would be considered a benefit in kind. This allowance would be calculated at 20% of the market value from the time it became available to the employee for their use. 

Your limited company would be liable for 13.8% 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?

If you have any questions about claiming home office expenses, call our friendly team today on 01253 843180 or email newbusiness@nixonwilliams.com for information. 

 

See more of our guides to expenses