More and more self-employed, Sole Traders and Partnerships in the UK choose to work from home, rather than renting a desk or offices nearby. If you too have chosen to work from home, then you are able to claim a proportion of your household bills as business expenses.
Calculating the use of home business expenses and helping reduce your tax
If your income is below the VAT threshold for the year of £81,000 you can use the simplified accounting method, allowing you to calculate the business use of your home in the Flat Rate Method.
Flat Rate Method
This is done by working out the hours you spend running your business from home and applies a fixed monthly cost which you can deduct monthly from income.
Depending on the hours a month you work will affect the rate you can charge against your business:
25-50 hours: £10 per month
51-100 hours: £18 per month
101 hours or more: £26 per month
As the title suggests this is a simple method and will produce a quick figure to deduct from profits for the year, this method however may not save you the most tax.
This is the second way to calculate the business expenses use of home and will have to be used for accounts and tax returns up until 5th April 2013. This is where you calculate and claim a proportion of actual household costs to your business.
HMRC states that the business apportionment needs to be on a “fair and reasonable” basis between the private elements of that cost.
One way to put this into a calculation is to see how many rooms are used for the business out of all the rooms in the house and then how much time that room is then used for business.
It is not a good idea to have any one room being used solely for business as you may become liable to business rates tax on top of council tax as well as capital gains tax when you eventually sell your home – too much tax! It is always best to have a dual purpose room for home use and business. For example my office space at home also has my eldest daughter’s desk for her homework and my littlest’s art easel for her contributions to our art wall in the kitchen!
If you have 6 rooms in your home (hallways, garages, lofts and bathrooms are not counted as rooms, unless the loft/garage has been converted for room/business use) and you use 1 room for business that make 1 out of 6 used for business or 1/6 which equals 16%.
Next you want to calculate the time it is used for business over its dual purpose family use as the advice above. It may be used 75% of the time for business, or you can measure the room and give the business a percentage based on square footage taken up by the business in that room.
If it is 75% then you times this figure by the 16% already calculated for rooms used, giving an overall 12% which is the magic number to charge against the total household costs you can claim annually.
Adding up the costs you can claim:
Mortgage and/or Rent You need the total rent or interest only part of the mortgage for your costs. You cannot claim any repayments you have made on your mortgage, only the interest charged for the year, usually shown on the annual statement.
Council Tax annual charge.
Light and heat Electricity and Gas bills paid.
Water is not usually included, but if you run a business such as window cleaning business that has direct usage then can claim this cost.
Telephone and broadband this can be claimed on usage not necessarily as part of this calculation as you may have a separate telephone line for business and broadband may also be for business only so therefore the whole amount could be deducted.
Property repairs this may be just on your office therefore you would charge 75% of the direct costs or maybe redecorating of the entire house including your office then you would charge 12% the same as the rest. If the repair is on a separate room that doesn’t affect where you work then you cannot claim any of the cost.
Claiming costs from your home as business use are never that simple hence why the Flat Rate Method has been brought in to simplify things. If in any doubt about what you can claim or whether it is giving you the best tax savings, always seek further advice from an accountant. We can help calculate your work from home allowances that can be claimed in your self assessment.