Many small companies perform lots of work from home. One of the most frequently asked questions by directors is what expenses can they legitimately claim back against their company?
HMRC’s rules for claiming business expenses for use of home as an office or renting part of your home to your company are strict and complex. We have broken down these rules to make it easy to understand the expenses you can and cannot include in your company’s accounts.
USE OF HOME as office expenses
If the director works from home HMRC allows to include £4 per week (up to £208 per year) as a fixed expense, without the need of any receipts. HMRC does not consider this amount to be a benefit in kind. Hence, there is no personal tax to pay on this amount. Additionally, you can include business use of telephone calls, dedicated business broadband and extra costs of lighting and heating the work place.
To include £208 as the company’s expense, director must undertake substantive duties related to the main trade of business. This means the business must have a trade or service activity, and the business activity must be undertaken from home. You should not include this expense if you simply sort your business post at home and work at clients’ premises only.
When we will produce your business annual accounts, we will ask whether you carry out substantive duties relating to your business at home and if you wish to include the £208 amount as the Use of Home – office expense.
Obviously, for many limited company owners who use their home as a workplace in a significant way, this will not cover even a fraction of the costs incurred. Therefore, the company may decide to include more than the £208 amount in accounts as a rental expense. However, this approach is complex and involves establishing formal rental agreement (a license to occupy the premises) between an individual company director and the limited company.
Also, the director issuing the rental agreement will have to include the rental income on their self-assessment tax return. He/she can offset specific expenses incurred, such as mortgage interest, building insurance, light, heating, repairs and maintenance, against rental income. Directors are allowed to deduct expenses in this way, because they would be operating as a property business by entering into a rental agreement with their company. If director charges the company more than the expenses incurred, there will be an income tax liability on the excess amount.
If you consider to include rental expenses in your annual accounts the following steps must be followed:
- Any amount over £208 cannot be classified as the use of home – office expense. The amount must be classified as the rental expenses.
- There must be a rental agreement to occupy the premises between the director and the company. A copy of this rental agreement must be provided to us before your annual accounts are prepared
- The director providing the rental agreement should own this property
- The rental agreement must be non-exclusive, it must state access is restricted to the specific area of the house wholly and exclusively associated with the rental expenses and over a specific time period each day
- The rental expense amount must be reasonably priced
To prove that your rental expenses are reasonable, the paperwork and calculations to support the amount included in your accounts needs to be comprehensive. In order to establish the proportion of household costs used by the business, you will need to work out the percentage of the property which is used for business purposes, what proportion of utility bills can be apportioned to business use (e.g. lighting or heating), and for how long each day the service is used for solely business reasons (for example, the business area only needs to have lighting for 50% of the day).
If you use a separate building on your residential premises, you can claim back all costs for maintaining that building, or even charge a proportion of the cost if the building has shared residential use. If the separate building is owned by the business, then more complex tax rules would apply, because it will become a business asset rather than a personal one.
Our accountants will check the calculation at the end of your company’s financial year and query any unreasonable or excessive items.
For most businesses, we recommend to include only £208 per annum (£4 per week) as an expense for using their home as an office in company’s annual accounts.
If you are thinking about entering into a rental agreement with your company, please seek advice from your accountant.
Do not forget, the way home office expenses are treated is very different for sole traders (also known as freelancers or self-employed). Find out what sole traders can claim back here.