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Home Office: allowable expenses and tax implications

Amid the COVID-19 pandemic, many people are encouraged to work from home and self-isolate. Whether you work from home permanently, or only temporarily during this crisis, there are certain tax issues and benefits that can present themselves when in a home office environment. Some topics I’ll cover are VAT, expenses, capital gains tax, and insurance.

expenses and tax implications title

VAT when working from home

There are many benefits of a home office in regards to value-added tax, and several things you can reclaim through HMRC. It is important to note that your company must be VAT registered in order to reclaim VAT.

If you work from home, you can reclaim 100% of VAT for office equipment used solely for business purposes. If you purchase a computer, printer, software, or work desk, you can reclaim the VAT through HMRC.

You can also reclaim VAT on certain utilities depending on how much you use them for personal and business use.

If you purchase a new mobile phone and phone plan and use it 80% for business purposes, and 20% for personal use, you can reclaim 80% of the VAT on the phone purchase and the plan. The same system applies for internet subscriptions.

Gas, electricity, and water can be reclaimed by the percentage of floor space the office uses in your home. For example, if your office takes up approximately 10% of your home, then you can reclaim 10% of VAT on the utility bills.

It is important to always keep records to support your VAT claim, and how you got to the estimated business usage, as HMRC may ask for this up to 6 years later.

Expenses you can claim when working from home

If you work from home, there are certain allowable expenses that you can claim based on how much they are used for business purposes. Some expenses you can claim are:

  • Occupancy expenses: Rent, mortgage interest, property taxes, and home insurance premiums
  • Utilities: water, electricity, gas/heating (based on home office floor space)
  • Cleaning/repairs to home office equipment
  • Internet costs (based on business usage)
  • Phone costs (based on business usage)

You can only claim your occupancy expenses if your home is your place of business and you have a specific work area in your home. You must also be able to prove that you are regularly using the office space for business use, and not using it for a small amount of administrative tasks while the majority of your job is done elsewhere like in clients offices or building sites.

Simplified expenses when working from home

Instead of calculating the business and personal use of certain expenses, you can claim them using a flat rate based on how many hours per month you work from home. You can only use the flat rate method if you work at least 25 hours per month from home.

The flat rate does not include phone or broadband expenses, but does include utilities such as water, electricity, and heating.

The flat rate is calculated by the hours worked from home in that month:

  • If you have worked between 25 and 50 hours, the flat rate is £10.
  • If you have worked between 51 and 100 hours, the flat rate is £18.
  • If you have worked more than 101 hours, the flat rate is £26.

For example, if you have worked 30 hours from home for 10 months, and then worked 105 hours for the next 2 months, the total you can claim is £152:

  • 10 months x £10 = 100
  • 2 months x £26 = 52
  • Total = £152

Tax relief when working from home

If you work from home on a regular basis, you may be able to claim tax relief for some of your bills. You cannot claim tax relief if you choose to work from home, but have an office elsewhere.

You can only claim for things that are solely used for your business. Things like rent and broadband that are used for both personal and business use cannot be claimed.

Your employer can pay you up to £4 per week, or £18 per month for extra costs incurred from working at home.

Capital allowances when working at home

A capital allowance is the money spent by a company for equipment, machinery, or vehicles, that can be deducted from what the company owes in tax.

For self-employed persons and sole traders, capital allowances may be available on the business proportion of the equipment, based on the estimated usage for business tasks. Since self-employed persons and sole traders will likely use this equipment for both business and personal use, they can claim the business percentage of use towards the capital allowance rules.

If your employees are working from home, capital allowances will be available to the company for equipment like laptops, chairs, and desks, as long as they are solely used for business-related tasks. It is recommended that an employer has a written policy indicating that the equipment is for work-related tasks only.

Capital gains tax (CGT) when working from home

If you do not have a home office and work from your couch or dining table, then your private residence will be exempt from CGT. If you do have a specific home office area that is exclusively for business use, then that portion of the property is subject to capital gains tax.

For example, if you bought your home for £200,000 and later sold it for £500,000, you are earning a capital gain of £300,000. If your home office took up 10% of your home and was used exclusively for business purposes throughout the period of ownership, then 10% (£30,000) of the gain would be subject to capital gains tax.

There are exceptions to this: if the home office was not used solely for business use, or if the home is jointly owned by 2 or more people.

If you have claimed home working costs like utilities for business use (see expenses above), then it would be possible to have a reduction in the capital gains tax exemption when it comes time to sell your home.

Benefit in kind when working from home

Benefits in kind (BIK) are taxable goods that are purchased or provided by a company in addition to your normal pay, such as a company car or private medical insurance.

The employer normally informs the employee and HMRC of the benefit in kind at the end of a tax year by filling in a P11D form, which will adjust the tax code. If you are self-employed, it is important for you to keep records of any benefits in kind you have on top of your salary.

If a company asset is used at all for personal tasks, it will be taxed as a benefit in kind. To avoid this tax, it would be best to use company assets solely for business use.

Business Rates when working from home

You don’t have to pay business rates if you work from home and use part of your home as an office (for instance, using a bedroom as an office). If your business is separate from your home but on the same property (for instance, you live above your shop), then you may need to pay business rates as well as Council tax.

Insurance when working from home

If you are just starting to work from home, you will need to let your home insurance provider know that you will have a home office.

Certain insurance companies will automatically cover up to £5,000 of home office equipment, however, most policies will not cover specialised equipment such as photocopiers, or 3D printers.

It is important to check with your insurance provider to ensure that all of your equipment is covered, or alternatively choose an "all-risk" policy to cover everything.

During this time of crisis, the UK government has provided information for employees, employers, and businesses on their website. This covers topics such as sick pay, travel arrangements, symptoms, employees with dependents, and limiting the spread of COVID-19.

The rules for tax deductions can be difficult to comprehend, and I hope this article shed some light on how your business can benefit from a home office.

If you are a freelancer or small business owner, it is always beneficial to consult a tax advisor or use online software to make your tax process simpler. Invoicing and accounting software like Debitoor can give you the tools you need to stay on top of your business from anywhere.