Introduction »

Use of home as office - expenses for the self-employed

The changes in technology during the last decade have been massive. Developments in mobile devices and cloud based computing provide accessible and flexible communication. However, travelling has become more and more difficult and expensive. Working at home has become the answer for many self-employed people.

The starting point is that the self-employed pay tax on the profits that the business makes or their share of those profits if they are in a partnership. What costs can be claimed and set against that profit? In general terms the costs must be incurred 'wholly and exclusively' for the purposes of the trade to be tax deductible. This may not always be easy to determine so HMRC have specific guidance in this situation.

If some business activity is carried on from home then some tax relief may be available. HMRC accept that even if the business is carried on elsewhere, a deduction for part of the household expenses is still acceptable provided that there are times when part of the home is solely used for business purposes.

Wholly and exclusively does not mean that business expenditure has to be separately billed or that part of the home must be permanently used for business purposes. However, it does mean that when part of the home is being used for the business then that is the sole use for that part at that time.

Apportioning costs

HMRC will accept that costs can be apportioned and in practice if a small amount is being claimed they will usually not be too interested. For example an estimate of £3 a week with no record keeping or other requirements will normally be acceptable to them. However, if more is to be claimed then the following factors would need to be considered:

• the proportion in terms of area of the home that is used for business purposes
• how much is consumed where there is a metered or measurable supply e.g. electricity, gas or water
• how long it is used for business purposes.

Generally, HMRC will accept a reasonable proportion of costs such as council tax, mortgage interest, insurance, water rates, general repairs and rent as well as cleaning, utility charges and metered water. Additionally other allowable costs may include business calls on a home telephone, a proportion of the line rental and expenditure on an internet connection where the connection is used for business purposes.

What about equipment used in the business? The depreciation of assets is covered by a set of tax reliefs known as capital allowances. Equipment at home, such as a laptop and desk, may qualify for a capital allowance claim based on the estimated business usage of these assets.

What about travel?

Another consequence of working from home is the potential impact on travel costs. The cost of travel from home to the place of business or operations is generally disallowed, as it represents the personal choice of where to live. The fact that the individual may sometimes work at home is irrelevant. However, where there are no separate business premises away from the home, travel costs to visit clients should be allowable. The crux of the matter is where the business is really run from.

A final point to be aware of is that capital gains tax contains an exemption for the sale of an individual's private home, known as principal private residence (PPR) relief. Where part of the dwelling is used exclusively for business purposes, PPR relief will not apply to the business portion of the gain. Occasional and very minor business use is generally ignored.

To summarise, it is possible to make various claims but be clear about the rules, keep good records and be sensible about how much to claim.

Introduction »