By Lynne Gowers on 10th November 2021

Reclaiming the costs of using your home as an office

When running a business from your home, there are three different ways you can reclaim some of the costs from your company. Here are the options:

  1. Home office flat rate allowance

If you run your business from home, you can currently claim a fixed rate expense of £6 a week.

This flat rate allowance can be deducted from your company profits for tax, without the need for any receipts.

HMRC does not consider this a Benefit In Kind, so you will have no personal tax to pay on the amount.

While this is a very simple way to claim home office expenses, £6 per week is unlikely to cover the real overheads of using your home as an office, so you may want to use one of the methods that are outlined below.

  1. Apportionment of utility bills

The golden rule for all work-related expenses is that they must be “wholly, exclusively and necessarily incurred”. For home office expenses to meet this rule, you need to establish what proportion of household bills are used exclusively by the business, such as the extra you spend on heating and lighting.

HMRC require that you use a “reasonable” method of calculating this and keep records to demonstrate this.

It is worth noting where a proportion of your home is used solely for business purposes this can restrict certain reliefs for capital gains tax purposes, therefore if you have a home office, it is a good idea to use it for something else for a proportion of the time.

One way to base the calculation is total floor space divided by number of rooms vs the time spent using the room as a work space only.

For example, you have a home office which takes up 10% of your floor space and is used for work 80% of the time. If your total heating bill is £350, of this you could reasonably apportion and claim £28.

Only certain household bills can be apportioned in this way, others are not allowable under HMRC rules.

  1. Rental agreement

Another alternative would be to have a rental agreement between the company and you as an individual and charge rent. This can be beneficial because it means that the rental payments can be deducted from the company’s pre-tax profit.

However, it is important to consider the following:

● You’ll need to have room dedicated to your business

● A formal rental agreement must be in place which is beneficial to both parties

● Rental income you receive from the company will have to be reported on your self-assessment tax return

● Rental figures should be commercially realistic.

Where the rental income is set at a level the same as the allowable expenses, this is a tax effective mechanism to receive corporation tax relief without incurring further personal liability. Where a rental agreement is in place disallowable items such as the relevant proportion of mortgage interest and council tax become an allowable expense.

It is good practice that this is discussed with your mortgage company and local authority to ensure doing so does not bear any impact on your mortgage or council tax rates.

Home office expenses – what is not allowable

HMRC does not allow limited company directors to claim tax relief on fixed costs, since they would have to be paid personally by the homeowner anyway. No part of them could be considered to be “wholly and exclusively” a business expense.

These include:

● Mortgage payments and interest

● Rent

● Council tax

● Water rates

● Home insurance

● Repairs

Read HMRC’s guidance on non-deductible home office expenses.

As noted above, this does not apply where there is a rental agreement in place and the director charges the company rent, that in turn is reported on their self-assessment tax return.

Additional considerations

There are additional expenses that can be claimed alongside standard £6 per week or utility, this may be items such as:

  • Home telephone line
  • Internet

In order for the above to apply and the employee / director to avoid a benefit in kind, the phone line should be a secondary phone line. If this is not the case, a benefit will arise on the cost of the line rental. Any additional costs incurred for business calls that can be itemised can be claimed accordingly without implication, where these are genuinely ‘wholly and exclusively for business purposes’

If there is insignificant personal use for the internet and this is in the company name this would be allowable, otherwise to provide access should be considered in line with the same rules as home telephone to avoid benefit in kind and a second line installed. Again, where any itemised bills can be identified and business use identified accordingly, this can be claimed without implication, where this is deemed ‘wholly and exclusively’ for business purposes

Computer costs should also be considered, where any use personally exceeds insignificant there may be a benefit in kind that arises on the employee, calculated at 20% of the value of the item each tax year (a company can however provide the employee with 1 mobile phone as an exempt benefit, where this is in the company name)

Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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