Working from home is becoming more common. It comes with a lot of advantages but also some implications for your tax bill.
By the time I started my professional career, smartphones were all the rage and the idea that everyone ought to sit at their office desk from nine to five, tied to a landline phone and desktop PC, was already on its way out.
In my opinion, flexibility makes a lot of sense.
For SME owner-operators, freelancers and contractors, it can reduce the cost of paying for premises, for starters. It’s not unusual these days to work from home by default and use shared working or meeting spaces on an ad-hoc basis when it’s absolutely necessary.
Working from home can also reduce the costs of childcare and commuting, and improve work-life balance – you can finish work at 5pm and be sitting on your sofa watching telly with the kids at 5:03.
There are potential downsides, too, though. If you’ve got a workaholic streak, having your office at home can make it harder to switch off at the end of the day. It also means that giving up some of your living space.
Assuming working from home works for you, however, the first big tax issue is one that affects contractors.
What is and isn’t allowable as a business expense is one of the questions I get asked most often.
It can be tricky for most people to stay on top of the rules as it is, but working from home throws up extra challenges on top.
The biggest issue is that an office, workshop or studio in the house makes the line between business and personal foggy, which means fewer clean yes/no answers.
For example, let’s say you work at a desk in the front room of your house. It’s warmed by your home’s gas central heating system and the electricity costs appear on your household bill. You use your personal mobile for business for the sake of simplicity.
Because people tend to see things in black-and-white, and there are two typical responses to this situation from those who don’t think it through:
Claim the entirety of the gas, electricity and phone bill as business expenses.
Or claim none of them.
In fact, the correct approach is a bit more fiddly, but does make complete sense: you can and should claim a reasonable portion of each of those bills.
If your yearly electricity bill is £1,000 (let’s keep the numbers round to make the sums easy) and your house has six main rooms, of which your office is one, you might:
- Work out a sixth of the total bill – £167 in this case.
- Divide it by the number of hours in each year (8,760) to get an hourly cost for heating a single room – 0.02p per hour.
- Then multiply the per-hour figure to cover the 35 or so hours per week you spend in the office – something like £36.
So, that would be a reasonable amount to claim as a business expense. HMRC might query it and if they do, you’ll have the working-out and paperwork to show them.
It’s a bit easier again with phone bills, even if it might require an hour going through the itemised list highlighting business calls. This is a lot easier if you do it month by month or using electronic records which you can filter and sort with ease.
Equally, you might just find it easier to get a second phone and contract for work. To be honest, that’s what I’d advise – it keeps things much simpler and neater.
Other expenses you can claim
You might be surprised by some of the other things you can claim.
For example, HMRC’s own Business Income Manual uses an example of someone who runs their business from home and is therefore able to claim a portion of an exterior paint job on the house.
If you pay for a home security system, a chunk of that cost might be eligible, too.
If you have a cleaner, you can apply the same principle: estimate how much work they do on your workspace, how much of their wages that represents, and then claim just that bit as a business expense.
Simplified expenses claims
Recognising that it is fiddly, HMRC introduced a simplified flat-rate system back in 2013.
If you’re self-employed as a sole trader and work from home for more than 25 hours each month, you can quickly claim against utilities based on set thresholds.
Although it is easier, you’ll still have to do some maths, but not as much as under the standard system.
The capital gains trap
Is your home workspace dedicated, or is it in general use by the family?
If your office or studio has a lock on the door, say, and only contains work-related furniture and equipment, the chances are it won’t qualify as a private residence for tax purposes.
That means that when you come to sell the property, you might face a reduction in the amount of capital gains tax relief you can claim.