One of the many positives of being self-employed is the opportunity to work from home and improve your work-life balance. Flexibility is one of the top reasons why people make the leap to become self-employed. It also massively benefits those who are unable to work a 9-5 office role, such as stay at home parents or those who have disabilities.
With this, you may not be aware but there are expenses you can claim while working from home, in this article we will look to cover what you can and can’t claim for.
If you have an office space at home, you may be able to claim expenses back for using your home as an office space. This may include claiming for office equipment like computers, furniture or even a percentage of your rental/mortgage costs for the amount of space you use for your company (a bit like renting out office space to yourself). The HMRC rules can be complex so we have made them more digestible to see what you can and can’t include when claiming expenses back.
Home Office Expenses
Inevitably with these kinds of benefits, there are means tests and rules to establish your eligibility for claiming back certain costs. You must be able to prove you spend a high proportion of your time in the office space rather than spending a small amount of time doing administrative work at home and then the majority is done out on the field or at client offices. Buying equipment that is essential for your business and performing the tasks required will receive tax relief. In addition, you will also be eligible to claim reasonable relief for the cost of furnishing your office space e.g. chairs, desks.
Is there a limit to what expenses I can claim back for my business?
This will depend on the way you’re set up to work. If you’re a limited company there are two ways of working out your home office expenses. This is:
1.) Use HMRC’s flat-rate amount
Probably the simpler way to calculate home office expenses is using HMRC’s published allowance for additional costs of running your business from home. You do not need receipts to prove your expenses and you can claim £6 per week, which is a total of £312 as of tax year 2020/21. It can be included as an allowable expense alongside any other expense claims.
HMRC also doesn’t treat this as a ‘benefit in kind’, meaning you won’t have to pay any tax on the amount through Self Assessment.
2.) Create a rental agreement between you and your limited company
If you’re operating as a limited company, you can look at renting your personal workspace in your home to your limited company and claim it as an expense. Provided you run your business through your limited company and follow the rules, you can potentially claim up to £312 a year.
To claim more than £312, you will need to set up a rental agreement between you (as the homeowner) and your limited company. If you do not have this agreement in place HMRC could classify the rent you receive from your limited company as additional salary (from your limited company) leaving you liable to tax and national insurance.
If you draw up an agreement your limited company can deduct rental payments from your company’s pre-tax profit, this will mean corporation tax is not paid on these expenses.
Your rental agreement can be used to cover the proportional costs of the rented space. There is no defined list of allowable expenses, it will depend on the facts in each case. You can include mortgage payments, utilities and council tax based on the amount of the property used for business purposes.
The internet connection must be purchased in the name of the limited company. In most circumstances, you can’t claim any internet costs as this will include personal use. However, if you adopt the rental agreement between your house and your business as previously discussed, this expense can be part of the rental calculation.
To claim the full tax relief you will need to set up a contract between your company and the service provider. Any personal calls are seen as a tax-free benefit in kind, falling into allowable business expenses. This means you will not be taxed or need to report on your Self Assessment return.
When taking out a phone contract in the name of your business, the monthly bill is treated as business expenses. If the total cost of the mobile phone and it’s contract is £1,000, this would be recorded as an allowable expense in your accounts. This would decrease your taxable profit and the amount of Corporation Tax you are liable to pay, a reduction of £190 (for the tax year 2020/21).
The only thing to bear in mind is when registering your phone in the name of your company, you will have to more than likely use one of the phone provider’s business tariffs, which can be slightly more expensive but this increase in cost will almost certainly be covered by your tax savings.
Claiming Expenses as a Sole Trader
The rules become different when you’re registered as a sole trader, with two options available:
Claim simplified expenses for the self-employed or you can work out your actual costs by calculating the proportion of personal and business use for your home. The government website has an expenses checker to help you decide which is best for you here.
We hope this overview has given you a clearer idea of what you can claim when working from home and most importantly how to save money. If you’re ever in doubt just ask the questions: are these expenses genuinely for business use? Can I prove it?
If you’re struggling to stay productive at home, check out another one of our posts for some Top Tips When Working From Home As A Contractor