Home business expenses

If you are self employed and work from home then this article may be of interest as it considers the household costs that can be claimed and the method of calculating a business deduction.

Before I start however, if monitoring household bills is not your thing and you do more than just ‘hobby trading’ then consider using a round sum claim of £2 a week, for which household bills do not need to be retained. Beware, however, for if you work only 40 weeks a year, the claim is 40 x 2 = £80.

Firstly, making a business claim is somewhat of an inexact science and the tax office will only seek to adjust excessive or invalid claims, i.e. where they argue that no relief should be due at all. Therefore do think twice about making a home business claim if your trade or profession is mobile or predominantly client site based. As always, the amount of the claim matters as the tax office will have less interest in a £100 claim as opposed to a £1,000 claim.

In order to make a claim you should have either a dedicated office (i.e. in a spare room) or a work station used mainly for business purposes in a quieter room of the house. Failing that, if a ‘family’ room is used significantly for business purposes, then this will qualify.

If you work from home then your telephone and power costs will increase but the mortgage will remain unchanged. This therefore highlights three distinction categories of costs, which I have listed below.

Fixed costs:

  • Payment of rent or mortgage interest (excluding capital repayments)
  • Building & content insurance
  • Property service charges (relevant to leaseholders)
  • Council tax

Property running costs:

  • Heat & light
  • Water (exclude if only making cups of tea)
  • Cleaning
  • Redecoration costs
  • Building repairs

Other running costs:

  • Home telephone & broadband
  • Mobile phone costs

Joint fixed costs should be split to arrive at the person’s share and so a married couple would split their fixed costs 50:50. Running costs should be calculated on the basis of ‘business use’ and based on the facts it is open to individuals to choose the method that best suits, whilst being careful of not making an excess claim. The common methods of calculating business use on running costs are as follows:

  • Property running costs – using the room basis (in lieu of floor area) with secondary business/personal use apportionment(if required)
  • Other running costs – using an actual use basis (useful only where exact costs are known)

It is easiest to illustrate the room basis with an example, so let’s take Keith, a married stage set designer with two children. He lives in a four bed house with exclusive business use of the study and 50% use (on a time used basis) of the child’s play room where he builds model stage sets. He works 45 weeks a year.

We calculate the number of rooms by excluding the bathroom, lavatory, entrance hall and pantry. This gives kitchen, dining room, lounge, study and four bedrooms, or 8 rooms in total of which one and a half rooms are used for business.

Using the room basis the business use cost would be:

(Fixed cost (Keith’s share) + Running costs) x (1.5/8) x (45/52) = CLAIM

Note that the running cost does not need to be reduced by the number of people living in the house as the most significant expense is likely to be for heating the house – mostly because the self employed person is at home. Note also that I chose not to use total days worked but full weeks. This is OK..

Telephone & internet costs

Home telephone costs can be either apportioned on an actual billed basis or apportioned on a ‘call sent and received time use basis’. With the fixed line charge split in the proportion of business use to total use. The internet bill will likely to be calculated on a best guess ‘apportionment’ basis.

Round sums

The unacceptable method of claiming home business expenses is the round sum basis where an annual claim for say £450 or £475 is included on the accounts and tax return. This figure will be the same or similar across tax years.

To the tax office, any unreasonable and unsupported claim is non-deductible and if they say, “No deduction without supporting calculations”, then you will be left with the choice of paying more tax or trying to substantiate the round sum claims.

Particularly galling will be the fact that only you can request and search for old bills and at the very least the extra time discussing the matter will result in higher accountancy fees related to this enquiry.

The tax return even has its own box to capture round sum misdemeanours.

See also the tax office examples click

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This article is for discussion purposes only and does not represent advice on which you should act without consulting a professional as tax legislation is complex and changes frequently.

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