Work from home allowance if you are a director & self employed

The work for home allowance and rules for claiming expenses are rather complex.

They apply whether you’re an employee, a limited company or self-employed, and it’s important to know what you are entitled to claim and when.

A lot of smaller outfits and those who are self-employed and providing a professional service to clients prefer to work from home than lease an office.

One of the most commonly asked questions from directors is what expenses can be claimed against your company?

One of the best benefits of working for yourself is the fact that you can choose to work from home.

The problem is that this can become quite costly, but not to panic.

There are two ways that you can claim back your home costs as business expenses: flat rates and rental agreements.

A Flat Rate

Currently, HMRC allows you to reclaim a flat rate of £18 per month, or £216 per year on your accounts.

This works out to £4 per week for each week that you work from home if you only use it for a portion of the year.

HMRC doesn’t consider this amount to be enough to pay tax on, which means you need to know how to include this amount as an expense on your accounts.

Substantive duties from home

You have to undertake substantive duties related to the main business trading that you are doing, which means you have to go beyond servicing individual clients and the business activity has to be undertaken from your home.

If you only use your home address as a place to sort business post or you work at the premises of a client, you won’t be able to include this expense.

Of course, the £208 is not enough to cover even a fraction of the costs you will have when you run your home as an office, but it’s not the only claim that you can make on your home as an office.

Rental Agreements

If you are working for yourself as a self-employed individual and you are contracting through another company, you could potentially claim more than £216 per year.

You could be eligible to claim for a higher allowance, but you’d have to set up a rental agreement between your company and yourself as an individual.

If you don’t have a formal agreement set up, you could find HMRC is classifying your rent as another salary, which would be taxed and subjected to National Insurance.

If you organise your home office like this, your company can deduct the rental payments from your taxes, which would work out that corporation tax wouldn’t be payable.

The things to remember are :

You need an office or spare room turned into an office that is dedicated to your business.
The rental figures that you claim need to be realistic – so that both parties will benefit from the agreement.
Periodic renal evaluations should be considered.
You need a formal agreement in place.
Any received income should be included on your personal tax returns

What You Can Claim

So, with the above options in mind, we need to move onto what you can claim for, so that you aren’t losing money where you don’t have to.

Office Furniture

You’ll need furniture and somewhere to sit in your home office, an when you are purchasing your furniture you have to consider if you would be using it as a personal item.

If so, you could end up being investigated.

Using it for personal reasons will mean that you cannot claim it as an expense, so you need to be able to prove what you’re using it for.

Landline and Mobile Costs

When you are making landline and mobile calls while you’re working your business from home, you can reclaim it as an allowable expense.

You need to think about adding a separate landline to your home for your business use, though, because if you use your landline as a shared business and personal line, you will not be able to claim.

HMRC have strict criteria for a business that needs a phone, and these are:

A clear business need to be providing an employee with a phone.

You need to be taking steps to keep track and reduce the costs of private use.

Internet Costs.

This one is tricky, as you cannot claim for broadband expenses if you had the contract in place before you started your business.

You can claim for internet access in your home office as long as you don’t have a separate record kept of access connections, personal use isn’t significant and the internet is in the name of your business.

Utilities

Light, heat and power expenses that incur as a result of using a home office can be claimed for.

Rent

When you have incurred additional rent charges exclusively for the purpose of running your business.

What You Cannot Claim

There are some things that you cannot claim for, and these are listed below:

Any mortgage capital, interest or rent if you would have incurred these costs anyway.
Water rates for the home
Any expenses where you do not keep hold of any receipts

It’s important to note, though, that if you are a director working from home, or an employee, you cannot claim mortgage interest or rent but if you are self-employed, you can.

How To Calculate Your Work From Home Allowance

% Space: Calculate the proportion of household space you use for business – No. of rooms used for business / No. of usable rooms in the house (exc. kitchens and bathrooms) – or square footage if your rooms are of disproportionate size
% Time: Calculate the amount of time the space is used for business. Hours per week used for business / 168 hours (24 x 7)
% to Claim = % Space x % Time
£ to Claim = the allowable costs x % to Claim

If in doubt – ask Universal Accountancy.

We will provide a tool or spreadsheet to help you prepare your claim.

For help with self assessment, tax returns or any accounting challenges contact us today.