Save Tax When Working From Home
The general rule on tax relief for those who work from home is that it can be claimed on expenses which are incurred “wholly and inclusively” in the running of your business. This is good as far as it goes, but it doesn’t go far enough.
Most home-workers spend money on goods or services which are “dual-use”, in the sense that they are used partly for the business and partly for personal use. Examples might include computing equipment or a telephone service. What is the rule on claiming for dual-use items?
In general, partial claims are allowed as long as the business part of the expenses can be clearly identified.
Dual Use ItemsThe home itself, of course, is a dual-use item since you run your business from it and also live in it. You are allowed to claim for part of the expenses involved in the upkeep of your home. For example, you can claim tax relief on part of your mortgage or on part of your electricity bills.
To do this, you need to make an estimate on what proportion of your home is used for business purposes. The simplest case is when you have a room which is exclusively used for business purposes. If you have 5 rooms in the house, you could say that 20% of your home is used for business purposes and so you could claim tax relief on 20% on the value of the home running costs.
When parts of the home are used for business purposes only some of the time, things get more complicated. In this case, estimates of what percentage of the home is used for business purposes based on time and space considerations are usually acceptable. You might want to make clear on the form, however, exactly how you arrived at these estimates. Round number figures tend to provoke suspicion and might lead to an inquiry.
Consequences of Claiming Tax Relief for Home Running CostsIt may sound like an unqualified good thing that you can claim tax relief for part of your home-running costs if you work from home. But it’s not. There’s a downside. Here are the potentially unpleasant things you need to be aware of :
- If you’re using part of your home as a business, you may be liable for business rates.
- Using your home as a place of business may affect your insurance rates.
- If you own your home and sell it later, you may have to pay capital gains tax on the business portion of it. For example, if you had said that 10% of your home was used for business purposes, you would be liable to be Capital Gains Tax on 10% of the difference between the price you paid for your home originally and the price you sold it at. Business asset depreciation allowances (such as taper relief) may reduce the amount you need to pay.
Employees Working From HomeIf you work from home as an employee of someone else, your employer may want to make a contribution to the additional expenses you incur because you are using the home as your workplace, for example the higher electricity bills or telephone costs.
These claims can be presented on a individual basis, as long as there is evidence to support them. Alternatively, the government allows your employer to pay you £2 per week tax-free for expenses without requiring any evidence to support it.
Travel Expenses for Employees Working From HomeIf you work from home as an employee, but occasionally travel somewhere, such as the company office, in connection with your work, you may be able to claim for your travel expenses. You can only do this if two things are true, however :
- The travel is irregular in nature. If you travel to the office one day each week, for example, you can’t claim.
- You work at home by necessity rather than by choice.