Whether you are running a home-based business or simply choosing not to work at the office a few days a week to avoid the commute, working from home is more popular than ever. Many companies have even decided to downsize their premises, making homeworking the norm unless there are meetings to attend in the office.
When you work at home, there may be opportunities to claim tax relief on some of the expenses incurred. This depends on how your homeworking arrangements are organised and what you want to claim for. For example, most people realise that you can reclaim the cost of phone calls, but did you know that it may be possible to claim for painting the exterior of your home if you use it as business premises and your clients visit you there?
This blog explains how HMRC regards homeworking claims for the purposes of claiming tax relief on expenses and what your eligibility might be.
Long term implications of homeworking
Before delving into the detail of what you can and can’t claim for, one of the biggest things to consider when you are deciding about whether to work from home or base a business at your home, is what the future implications for capital gains tax may be. The tax rates for selling residential property are relatively high in relation to other CGT rates, hence the need to consider these implications from the outset.
If you sell a property that is your main residence you can usually claim PPR (principal private residence) relief which means you do not have to pay any capital gains tax (CGT) if it has appreciated in value. Without PPR relief, the CGT rate can be as high as 28% on any gains made when you come to selling. If you use part of your home exclusively for business purposes, that part may not qualify for PPR relief, therefore it is sensible to use part of your home as a shared space for business purposes and also for other purposes.
Self-employed home workers: what can you claim?
If you are self-employed and your business is entirely based at home, you should be entitled to claim a number of expenses, provided they are wholly and exclusively incurred for the purpose of running the business. However, if you have separate business premises e.g. a shop, and choose to work at home sometimes, or perhaps you use a room at home out of normal hours to do some admin, this will affect your eligibility and the amount of tax relief you can feasibly claim, which is calculated in proportion to the level of usage.
If you plan to work from home and convert and area of the house to become your office, or if you want to install a garden room, the actual conversion and construction costs themselves are not eligible for capital allowances, but many of the fixtures might be, for example electrical wiring, plumbing and furniture.
If you are a sole trader or working in a partnership, you may be able to claim for a proportion of household costs – like heating and electricity, council tax, mortgage interest or rental payments, telephone or internet costs. These are normally calculated by dividing up the rooms used in the business and the amount of time spent working at home. If there is only very minor use, e.g. some admin in the evenings, you may still be able to make a small claim.
If you work for 25 hours a month or more from home, it may be possible to adopt the cash basis for claiming expenses. This is a flat rate based on the total number of hours worked. This will avoid having to work out the proportion of costs that can be attributed to business use. However it won’t include telephone and internet costs; these still have to be calculated separately and apportioned.
If you also live at your business premises, it is possible to use the flat rate method to calculate allowable expenses, based on the number of hours worked and number of people living at the property. For instance, if you and your partner run a care home and live there, you would be eligible to make an annual claim of up to £26 x 12 months for using the premises as a business and a further £500 x 12 per year for the number of people involved with the business who are living at the property. This amount would be offset against the total business expenses incurred.
Employees who are home workers: what can you claim?
If you are a company employee, you must first consider whether you have to work from home because it is a stipulation of your working arrangements, or if you prefer to do so as a matter of choice. It is only expenses that are incurred wholly and exclusively for the business that are allowable.
For those in the former category, the relevant expenses can be claimed. Those in the latter group may be entitled to certain exemptions for reimbursed expenses that they can claim from their employer.
As with the self-employed, employees can claim for utility bills and telecommunications costs, and the amounts allowable are calculated as a proportion of total usage levels. If it is not feasible to calculate the actual usage levels, a flat rate of £4 a week can be assigned for all expenses except telephone calls – these have to be calculated separately.
Where an arrangement exists for an employee to work from home, tax exempt payments can be made to cover household expenses like heating and lighting, insurance premiums plus use of the telephone and broadband. Fixed costs that would be incurred anyway – like mortgage interest, rental payments and council tax – cannot be included in a payment claim. Costs relating to converting a property to create a home work space are also excluded, as they are for self-employed people, but removable assets – furniture and electrical wiring, laptops and stationery etc, can be included.
Returning now to the issue of your PPR and being eligible for PPR relief in the case of a property that was used for business or work purposes is then sold for a profit, the ramifications can be complicated.
As we highlighted in our recent blog about PPR eligibility, it is most likely that some of the gain would not qualify for PPR relief but identifying how much would need specialist advice. The key criterion is whether an area of the house has been dedicated purely for the business or if the facilities have a dual purpose. If you are planning to work from home or set up a home-based business, it is worth discussing the potential implications before you start.