Working from Home
Technology has changed the way many businesses now operate. As such, it is now much easier for many companies to operate completely from home. With the internet changing the way customers purchase goods, as well as the type of goods and services being offered, it is only natural to see an increase in the creation of small, home-based businesses.
Whilst working from home, of course, offers numerous benefits to you as a person, and to businesses, particularly new ones, HMRC regulations regarding this area are somewhat complicated, and you will therefore need to first check that you will indeed be able to qualify as working from home. To help you get a better understanding of what HMRC requires and whether your business qualifies, we have put together the following details to give you a clearer idea as to what you can and cannot include in your business accounts.
Working from home – expenses
HMRC enables businesses to claim up to £208 annually as an expense if it operates from home. If you intend to only work from home for part of the year, this allowance is calculated at £4 per week for the duration of your time working from home. Furthermore, as this £208 is not considered a ‘Benefit in Kind’ you will not be required to pay personal tax on it.
However, to qualify for this deduction, you must first be able to prove that a significant part of your business operations is being conducted at your home. For example, if you simply answer emails and sort business post at home you will not qualify for this. Likewise, if you perform a major part of your operations offsite elsewhere, such as at a client’s premises, and are only at home for short periods of the day, HMRC will not consider this working from home. If this happens, you will not be able to claim the £208 deduction.
Rental expenses
It is possible to claim for more than the £208 allowance if rental expenses for use of your own home for business purposes are included. However, this area can be quite complicated as it involves creating a licensing agreement between the Limited Company and you as Company Director. This is a legal document and should, therefore, meet strict criteria surrounding the financial details of the agreement. Furthermore, any income you receive from renting your home to your business must be included in your annual Self-Assessment form. As you will be in a legal rental agreement with your company, you will be classed as a ‘Property Business’, and therefore allowed to deduct certain expenses from this. If you are considering using your home as a business premise and wish to include rental expenses in your yearly accounts, it is important to remember the following:
- Any amount over £208 is classified as a rental expense
- You must have a license agreement to use the premises for work purposes. This agreement should be between you, the Director (if not you) and the company
- The Director agreeing to the rental agreement owns the property in question
- The rental amount must be reasonable – meaning it reflects average markets prices at that time and is representative of the amount of work you do and company profits
Including rental expenses in tax Self-Assessment
If you are the Director and you create a rental agreement with the company, you are required to include any rental income you receive in your yearly Self-Assessment tax return. However, you will be able to deduct certain expenses from this, including any repairs and maintenance carried out, mortgage interest, and heating and lighting expenses. You are advised to keep clear records of such deductions and all utility bills, etc., as if you are found to have charged your company more than what was incurred, you will be liable to income tax payment on whatever the excess is.
Qualifying to work from home
The attractions of working from home are obvious – particularly if you can then deduct rent and other bills from this. As such, it is common for many businesses to seek out this option. However, as we have shown, the guidelines surrounding this are very specific and therefore you will really have to calculate whether you will indeed match these requirements. Remember, you must be able to clearly prove that you are able to carry out a substantial part of your work duties at home. Furthermore, regarding the use of gas and electricity at home, you must again prove that a significant portion of the total energy used is for business purposes. Whilst you can include lighting and heating in this, again, you need to be able to show that these were predominantly used for business purposes, not personal. If you are unsure as to whether you qualify or not, the government has provided a detailed breakdown of what is needed, including details of required energy usage levels.
Working from home – rewarding & rewarding
Working from home can be rewarding, both from a business perspective and a personal one. Eliminating commute times and expenses and providing you with more time to focus on your business, the many benefits of doing so are obvious. Whilst there are numerous factors that you must consider from a tax point of view, the overall process is straightforward and does not take that much time. We hope this small introduction to working from home, as well as the tax implications of doing so, has been useful and given you a better idea of what you need to do next.
