How to calculate business expenses when working from home

Calculating allowable expenses whilst working from home

Working from home, especially if you are a freelancer, has always been common place and so it is no surprise that a couple of common questions, even before March 2020 and the introduction of COVID into our lives, from the self-employed that we look after were “what expenses can I claim whilst working from home?” and “can I reclaim the costs of working from home?”. As expected, these questions became significantly more important and relevant when the vast majority of the nation was forced to work from home for a significant period of time due to COVID restrictions.

Though it is clear that many workers have enjoyed the change to the status-quo, perhaps due to a reduction in commuting time and/or generally a better work/life balance, what was not quite as expected was just how much more it can cost a household financially when using their home as an office! Many households found that due to increased electricity and water consumption, their overall charges for the year rose materially which left a hole in their pocket.

It is therefore vital that you are aware of what options are available to you if you are a sole trader, part of a partnership or a director of a Limited Company. This article aims to discuss the answers to these questions, and key considerations for both:

Limited Companies:

Reclaimable costs of working from home

Unfortunately due to the rules that govern Limited companies, there are key differences between what expenses can be claimed as a company versus as a sole trader or partnership. For example, the fixed costs of running your house, i.e. expenses that have a ‘duality of purpose’ (i.e. used both personally and for business) such as electricity or water charges, cannot be claimed. Therefore even though there is a clear argument that the electricity and water in your house used enables you to work, unless you have a separate metre for these utilities that clearly shows the differentiation between business and personal use, the costs cannot be put through your Limited company as an expense.

That being said, if you do have a separate metre for your heat, light and power, or for example have a separate landline bill that relates to your business usage, you would be able to claim these business costs as a tax deductible expense. It is very important that if you do claim for fixed costs relating to your household that are in the business name, that you keep a record of these bills so that they can be used as justification and evidence should you be investigated by HMRC.

The ‘Use of Home’ allowance

Another way in which home working expenses may be calculated for a director of a Limited Company is by claiming the £6 use of home allowance per week. HMRC allow £6 per week, or £312 per year, to be paid from your Limited Company to cover general costs of working from home and this requires no justification, regardless of the amount of hours you work from home. It is also worth stressing that this allowance is per director, and so if you have a Limited company with your partner who is also a director of your company, this equates to £624 per year that can be claimed as a tax deductible expense.

Formal contract with your own company

It may be the case that after calculating how much you can claim via the options above, you feel that this still does not accurately reflect the extra legitimate costs that have been incurred as a result of using your home as an office. At this point, you could explore the possibility of setting up a formal contract between yourself as an individual and your own Limited company, whereby you as the property owner invoice your company for ‘rent’ of the office space. Due to the fact that you are clearly a connected party to your own Limited company, it is vital that this is set up on a market-rate basis, with real working arrangements- in essence, it must be seen as a commercial ‘arms length’ agreement.

This option will likely significantly provide a much greater reduction in the company’s corporation tax bill, but nothing comes for free! As you as an individual would be receiving rental income, some or all of this income would be liable for personal tax, and so the benefits/drawbacks to such an arrangement from a tax perspective must be reviewed comprehensively before any decision is made. Should you wish for the team to look into this for you, please do contact us about this.

Sole Traders/Partnerships:

The way in which a sole trader or partnership calculates their ‘use of home’ charge differs to that of a director of a Limited Company. As a sole trader/partnership, you can claim a portion of the running costs of your home (for instance rent/mortgage interest, utility and council tax bills) based on a number of household specific factors. These factors include how many rooms the property has, whether you have a dedicated room for business, the personal to business ratio of the use of the room(s), the time spent working from home and the specific costs incurred in running the house. A calculation is then completed based on these specific costs and details of your home, which then generates the ‘use of home’ cost that be included within your self assessment Tax Return. 

Dependent on the households circumstances, the above method when calculated has the ability to allow for a greater home working claim to be made, in turn potentially saving a material amount of personal tax. However, if you are in a position where you don’t frequently work from home and this calculation doesn’t exceed the flat rate HMRC allowance of £312, you can simply revert to the £6pw allowance instead.

Summary:

Due to such a drastic change in trading circumstances for the majority of freelancers, it is important to fully utilise the ‘working from home’ charge. Offsetting this cost against your trading profits may go a long way in reducing your corporation tax bill which may be very useful. This is especially the case given that many of those working almost exclusively from home will have have significantly fewer travel/subsistence (you are not able to claim subsistence costs because they are by definition work lunches on the go and you will no longer be ‘on the go’) related expenses.

If you require more specific guidance on what expenses you can claim whilst working from home or how to calculate your working from home allowance, please don’t hesitate to get in touch with us and we’d be happy to help.