How are home office expenses deductible for your business?

How are home office expenses deductible for your business?
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How are home office expenses deductible for your business?

Some expenses can be claimed from the business by a self-employed or an employee for using their home for business purposes. Deductible costs must be wholly and exclusively for business use.

There are two main ways in how can claim the use of home expenses from the business:

  1. Claim for a proportion of the home expenses
  2. Simplified expense – Flat rate deduction

Steps we need to be mindful of:

First, we need to deduce the % of home office attributable for business purposes. Secondly, work out the total number of hours worked. You should also, correctly apportion the expenses based on the % for business purposes and the number of hours worked.

Step: 1 – How to calculate the % attributable to business use?

Floor space (square feet) in percentage

It is calculated by dividing the home office space from the total size of the property.

Example:

Lisa’s house is measured to be 1500 sq ft. The home office space/ is 175 sq. ft.

The % of floor space used for business purposes will be 175/1500 *100% = 11.67%.

Number of heated rooms used for business purposes

These rooms should have heaters and must be suitable for the claimant to work in and pursuit utilising the space. If the room has part-usage, please take the business use only.

Example:

There are four heated rooms in the house, and one room is exclusively kept for office use. Therefore, 1 room can be treated as used for 60% to 90% for business purposes or allocated depending on how long it is occupied.

Please note the room cannot be occupied 100% of the time for business purposes, as this doesn’t sound reasonable, and the claimant will be liable to pay council tax at business rates.

Step: 2 – Number of Hours Worked

This can be calculated for a day, weekly, monthly, or yearly basis by multiplying the number of hours into the number of days worked.

Step: 3 – Apportionment of Expenses

Three rules must be kept in mind and are explained below, which will help you identify whether an expense is deductible from the business and how it must be apportioned.

  • Expenses incurred exclusively for the home office – These are expenses that have been solely spent for the home office and are claimable in full directly from the business. Some examples can be furniture, equipment, fixtures & fittings necessarily used for the home office, and can now claim telephone and broadband bills from the company.
  • Expenses incurred for a dual purpose (business & private use) – These are expenses incurred for the whole house and therefore need to be apportioned for business use.

Some of the general expenses known to us that need to be apportioned are as follows:

  • Rent or mortgage interest
  • Light and heat
  • Council tax
  • Home insurance
  • Cleaning
  • Water
  • Telephone & Internet
  • Home repairs or revenue expenditures incurred in converting part of the home for office use.

Example:

Rick has three heated rooms in his house, and one room is used for both business and private use. The room represents 10% of floor space and is used 10 hours for business and 4 hours for personal purposes. For the remaining 12 hours, the room is not used. The total annual expenses incurred were mortgage interest of £380 and light and heat of £300.

Apportioned amounts, therefore, will be as follows.

  1. Mortgage interest – Since this must be incurred regardless of the business use, we apportion the cost based on the total hours a day (24 hours) into the.

£380 x 10% x (10 hr/ 24 hr) = £15.833

  1. Light and heat – We can only claim that the business hours worked out of the total hour’s room were used and will therefore be 10/14.

£300 x 10% x (10 hr / 14 hr) = £21.429

  • Non-Business Portion or Incidental Expenses are entirely irrelevant expenses for business purposes and most relevant to private use. These, therefore, cannot be claimed at all and is not deductible from the business. An example of a non-business expense can be repaired in the kitchen pantry or installing personal capital additions in the bathroom. An example of an incidental expense can be entertaining clients at home, which is a disallowable expense per legislation.
  • The critical point to remember when claiming the home office expenses from the business is to check the period in which you have worked from home and only appropriate for those months. If you are not fully occupied at home for business purposes, the claimed amount must be restricted to the actual usage.

Simplified Expense

You can claim the use of a home allowance which is £6 per week, or by using the flat rate deductions given below (provided by HMRC). It may be more suitable and effective than claiming the business portion of the actual cost.

The amount claimable is calculated based on the number of hours you have worked from home in a month.

Business use (per month)

Flat Rate claimable

  • 25 to 50 hours – £10 per month
  • 51 to 100 hours – £18 per month
  • 101 and more hours- £26 per month

Example:

Let’s say you have worked for 80 hours from home for four months and after that worked for 105 hours for eight months. What is the total amount claimable for these ten months?

  • 4 months x £18 = £72
  • 8 months x £26= £208
  • Total you can claim = £280

Are you renting out a home office for Business Use?

A director of the business can opt to charge the company rent for part-business use of their home office but, the following will be required:

  • Required to draw up a formal legal rent agreement
  • The rent payable must be at commercial rates.
  • There must be a room dedicated to the business
  • Monthly reviews must be conducted to ensure the rent is paid as per the agreement

The advantage of this is that the rental agreement can cover the proportional cost of expenses used for business use, and rent can be deducted from the pre-tax business profits.

The disadvantage to this if the director decides to sell the property, they will have to reimburse Capital Gains Tax on the disposal of the business part and will not qualify for the private residence relief.

Important Points to Note

  • Apportioned costs being claimed must be reasonable and not be too excessive.
  • Receipts and proof of the bills and amounts should be maintained in case of audits. Insufficient evidence and excessive claims will lead to penalties for the business.
  • Identifying what expenses a company can claim will depend on the nature of the business activity. For example, a company dealing with catering requires the kitchen and therefore, this is acceptable.
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