For those who’re just starting a new business at home understanding exactly which of your business costs can be offset against tax tends to be a source of great confusion.
Broadly speaking, there are two kinds of expenditure you can make for your business: purchasing capital such as equipment or property; or more ephemeral expenses such as hiring someone to design a logo for you. Each is treated differently. With capital allowances, the item is expected to continue in use for some time so you do not claim its entire cost in one year, only a proportion of it. In later years, you can claim further proportions of it. How much you should claim in each year varies from one item to another. You should consult an accountant for advice on how to approach this. By contrast, the full value of expenses can usually be claimed in the year in which they were incurred.
The golden rule of claiming expenses is that they must have been incurred “wholly and exclusively” in pursuit of business purposes. This becomes especially problematic for those working from home.
In some cases, there may be a very clear distinction between your home and business expenditures. For example, if you maintain separate telephone lines at home for your business and for your personal life, your business-related telephone expenditures will then be completely clear. If you have only one telephone, however, and use it for a mix of personal and business calls, the situation becomes trickier. Then you will have to itemise the business calls you make and claim for those only.
Many of the rules relating to businesses operating from home follow this general pattern. If the expenditure relates wholly to a business purpose, you can claim for it; if it relates partly to personal use and partly to business use, you must make an effort to quantify the total value of the business-related expenditures only. In some cases, estimates are acceptable, as long as they are well-grounded and you can justify them if necessary.
The same rules apply in relation to the costs of maintaining your home itself. For example, if you had a room in the house which was used as a home office, and only for that purpose, and by size it constituted roughly 10% of the total area of the house, you could claim for 10% of the house-related expenses such as electricity bills.
There are some things to be aware of if you plan to make any claims related to the house itself, though. First, if you claim that part of the house is used exclusively for business purposes, before long you may find that your local council wants to you to pay business rates! And if you later sell your home at a profit, the Treasury may demand a cut of the proceeds as Capital Gains Tax!
Travel-Related ExpensesOrdinary travel to work expenses are not claimable. If you are working from home, of course, these should not arise anyway. Making special trips to client sites is a claimable expense. The cost of lunch is not claimable, regardless of where you are.
There are different ways of dealing with vehicle-related costs. The first is to make a careful record of each expenditure: every time you fill up with fuel, or pay a repair bill, for example, you must record the transaction and keep the receipts. An acceptable alternative, and one that is usually preferred, is to make claims on a mileage basis only. The treasury accepts vehicle-related claims at a rate of 40p per mile for the first 10,000 miles and 25p per mile thereafter.