Use of home as office
Written by Ray Coman
Business premises costs are generally tax-deductible expense. By extension, the cost of using a home for work purposes could be deducted from taxable profits. The tax deduction depends on the extent to which the property is used for a business or employment purpose.
Home working is a growing global trend, reducing commuting costs and enabling more flexible, family friendly living arrangements. Deductible expenses are characteristically lower for an employee than for a sole trader. From 6 April 2020, an employee can deduct a fixed weekly amount of £6 per week from taxable earnings. Prior to 2020/21, the weekly rate was £4. If this is HMRC rate is lower than actual costs, a percentage of household costs can be used to establish the reduction in taxable income. If the fixed rate is not used, it will be necessary to keep proof of expenditure. Further information on how to calculate use of home with the actual basis is explained below.
From 2013-14, HMRC have introduced a system of simplified expenses. This allows a taxpayer to use a flat rate to determine tax deductible expenses. As the table below demonstrates the flat rates are well below the typical cost of running a premises especially, for instance, in London.
Notwithstanding, the regulation reduces the onus of record keeping because it is only necessary to demonstrate time spent working from home. The flat rate relieves the taxpayer from evidencing the cost of working from home. The rate is best suited where the benefit of reduced paperwork outweighs the cost of more detailed calculation.
The simplified expenses only apply where the hours worked from home exceed 25 per month. They are used by self employed individuals.
|Hours per month used for work||Monthly flat rate|
|25 to 50||£10|
|51 to 100||£18|
For an individual living on the business property, it is possible to use an HMRC flat rate to ‘write-back’ the expenses related to personal use. In that case, all property costs are deducted from taxable profits, and a fixed amount is added back to profits. This fixed amount is to cover household items, food, drink and utilities bought in the business name but consumed privately.
The above flat rates could be especially useful to pub owners and landlords of a small hotel or bed and breakfast.
The adjustment back to profit is as follows:
|Number of occupants||Monthly addition to profit|
|Three or more||£650|
The flat rate above does not include rent, mortgage interest, council tax, business rates or building insurance. The personal use element of those expenses will need to be added to taxable profit in addition to the flat rate.
If the saving in time and hassle does not outweigh the cost, a greater tax benefit could be achieved by deducting a proportion of actual costs as explained below.
A reasonable basis of apportionment for household costs is the floor area used for work as a proportion of the total floor area of the home. The whole floor space applies to areas with exclusive use; storage rooms and studies. Part floor area is sensible for mixed use areas such as passages.
The business share of total household costs can be further reduced according to time in which the home is not used for work. The applicable percentage is the amount of time spent working at home as a proportion of the total amount of time spent at home.
Certain costs depend on actual usage. These include light and heat, metered water, repair and cleaning costs. Typically, the costs of lighting and heating the workspace is about the same as for any other space in the home. In this case, an apportionment based on floor area and or time spent is reasonable. However, where the work involves above average consumption, for instance owing to the use of heavy machinery, it would be more reasonable to use incremental cost. The business expenditure in that case is the additional light and heat expended as a result of working from home.
Home telephone and internet costs can usually be deducted based on actual usage. However, where costs are fixed, time spent is likely the most realistic basis of allocation.
The cost of any hospitality is treated as entertaining and is therefore not tax deductible.
Certain costs are sunk. Expenditure which remains constant regardless of the extent to which the property is used for business purposes. Examples include: council tax, water rates, buildings insurance, mortgage (interest element only) or rent.
Where the area is used exclusively for business purposes, HMRC have indicated that it is acceptable to make a deduction from profits based on floor area. It is not necessary to make a further deduction for time spent. The reasoning is that any time spent in the dedicated area is committed to work. This will however have capital gains tax implications. There could be a tax benefit to making an adjustment based on time spent, howsoever minor.
Where the same space is used for business and non-business use: tax deductible costs are found by applying the percentage floor area multiplied by the percentage time spent working.
Coman & Co has put together a rough guide of percentages to apply in typical situations:
|50||Small studio flat which doubles up as a workspace. The is little or no work done on client premises|
|25||Purpose built shed, separate room or distinct workspace, and work almost exclusively from home|
|10 -15||Work part week from home|
|5 -7||Work evenings|
|2||Occasional an incidental usage only|
The table above is the considered opinion of a chartered tax adviser. It does not carry the force of law.
Unused space in the home; a garage, loft, attic or shed can be converted into a purpose-built workspace. Works can be divided into the following classifications for tax purposes:
Structural aspects including stud work, permanent walls, doors, staircases and floors. These costs of are not deducted from taxable profits, but are added to the total cost on calculation of any gain or loss on disposal of the work space.
Integral features such as glazing, office furniture, fixtures, movable walls, the central heating system, cold water and electricity system, lights and computer equipment. Using the annual investment allowance, the integral features can be deducted from taxable profits in the same year as the cost for these items is incurred. For reporting purposes, integral features are included in the fixed assets register which is a constituent of the balance sheet, and not as an item of profit and loss.
Day to day expenditure such as cosmetic decoration, atmospheric wall-hangings and maintenance. Further information about can be found in the review of repair costs.
Certain labour and material costs are related to the build project overall and not directly attributable to the above three categories. The percentage of the whole project spent respectively on the structural, the integral features and the maintenance costs could be used as basis of apportioning unattributable costs.
A property is usually exempt from capital gains tax if it is the owner’s home or principal private residence. Any part of the home which is used exclusive for work purposes, would not be exempt from capital gains tax. This could be unavoidable for workspaces which have a separate front door and address, such as a converted barn. However, in most cases it would be prudent to establish some non-business use, so as to preserve what can be a valuable tax exemption. To give an example, proof of non-work use of a computer could negate the exclusivity of the workspace for business purposes.
Where capital gains tax does apply, the rate would not be that applicable to residential property. Gains on disposal of business premises are taxed at a lower rate than gains on disposal of residential property. It is likely that the annual exemption would further reduce any taxable gains, more so where the property is co-owned.
While the home remains the property of the business owner, a tax benefit could be obtained by placing the newly built office area in the name of the company. This is because in certain instances, if the property is sold back to the homeowner at the same time that the business ceases or is sold, then the gain will be eligible for entrepreneur’s relief. It is a requirement for the company to have paid a full market rate for the disposal to attract entrepreneur’s relief. The Vat section below explains how VAT can be recovered on features integral to a building.
The rules about claiming use of home as an office are more restrictive for an employee than for a sole trader.
HMRC have explained that mortgage interest, rent, council tax, water rates and building insurance cannot be deducted from the calculation of use of home as office for an employee. Only gas, metered water, telephone bills and the other additional costs of working from home are tax deductible.
- The work carried out must be “substantive duties” i.e. the main or substantial part of the job. This would contrast with incidental duties, such as preparing weekly expense claims; or
- The equipment or facilities required to carry out the job cannot be available on the employer premises; or
- The employee lives too far away to travel to work every day.
- Tax relief is only available for working from home which is required under an employment contract, and not where it is made as a choice.
In certain cases, an employer will agree to reimburse an employee for the additional cost of working from home.
A payment will not be treated as a taxable benefit for the employee provided it is:
- £18 a month or
- If higher, no more than the actual costs of working from home.
It is not required for an employee to be obliged to work from home in order for the payment to be a non-taxable benefit. A company can obtain tax relief for reimbursing employees who choose to work from home. By contrast, the employee can only obtain tax relief on the cost of working from home where it is compulsory.
HMRC have specifically stated their view that directors of service company will often not carry out ‘substantive’ duties from home. That view would apply because, for instance, the director basically works on client premises. In that case, a director cannot deduct the cost of working from home. Where a substantial part of the work is carried out a home, such as in the case of a software developer, a deduction can be made for working from home.
Given that only the variable costs can be deducted for costs reimbursed by a director, the regulations put company owners at a disadvantage to other business owners. This is because sole traders, partners or members of an LLP can deduct a portion of fixed costs.
A workaround is to charge the company rent for using the home. Payments of rent can be deducted from profits chargeable to corporation tax. The income in the hands of the landlord can be reduced by the proportion of both fixed and variable costs. There is no restriction on the deduction of mortgage interest for owners of business premises.
Business owners could contemplate a license agreement for their company to use the space. However, there is no requirement in the tax regulation for a license agreement and therefore this agreement itself would not guarantee any particular tax treatment. It is only necessary that the space is used for business purposes to obtain a deduction from profits chargeable to corporation tax.
Where it forms part of a home, it would seldom be advisable to opt to tax the commercial premises. While Vat can be reclaimed on the building cost, it would require VAT to be added to part of the sale proceeds. If the property is effectively being sold as a residential unit in its entirely, VAT would be an odd and unwelcome feature of the selling prospectus. Nonetheless, VAT could be reclaimed on office equipment, supplies and integral features for VAT registered owners.
Sole traders and partners should consider the merits of claiming a proportion of actual costs given the modest flat rate offered by HMRC.
Where home working expenses are incidental, a director can deduct a portion of light and heat to keep matters simple. However, where the homeworking costs are more significant, the company owner should consider charging rent to obtain tax relief on a more substantial portion of the costs.
A purpose-built workspace could be owned by the company to obtain certain VAT and even capital gains tax advantages.