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WFH Expenses

What can you claim as tax deductible expenditure when working from home

 

 

With increased time spent working from home the entitlement of what people can claim as allowable expense for tax purposes is potentially higher. There are several ways of calculating cost of home office use. The treatment is different depending on if the legal status is Soletrader or a Limited company employee/Director. We will discuss both options below.

 

Soletraders and partnerships

 

The rules are more generous for this group and they can even claim home use if their regular office is rented  elsewhere, in which case the amount claimed should be apportioned according to time   home is used as the office. Below are some examples of options available, however readers should always contact a professional to consider their specific circumstances.

 

Working from home allowance would generally consist of three parts:

 

  • Household costs
  • Room or area used for business as a % of total rooms/area in the house
  • Time spent at home doing business as a % of total time spent at home

 

We will analyse the three areas below in more detail.

 

  • What household costs can be claimed?

Fixed costs

  • Interest on mortgage or rent
  • Council tax
  • Water if fixed amount per year
  • Buildings and contents insurance

 

Variable costs

  • Electricity, gas, water if metered
  • Cleaning
  • Telephone and internet expenses

 

Capital costs

  • Desk, chairs, monitors, laptop and any other office furniture can be claimed using capital allowances. Annual Investment Allowance (AIA), which lets businesses deduct 100% in the year of purchase, is £1 million on the purchases made between 1 January 2019 to 31 December 2020. If the equipment has some private use, the allowance should be apportioned accordingly.

 

It is possible to also claim some repairs and maintenance but one needs to be careful how they work these out. If they repair an office that has say 98% of business use, then they can claim 98% repair cost of that office, but then they will not be able to claim proportion of general repairs and maintenance in the rest of the property.

 

 

 

  • How to work out Business use vs Private use

It is very important to note that if one claims any part of the property as 100% business use then they will lose part of their Private Residence Relief (PRR), which is the Capital Gains Tax relief given on the sale of their main home. Even if home office has 2% private use, they will save their PRR entirely. They just need to apportion home office expenditure accordingly.

 

There are couple of ways to work out business use. For example, if they work in one of the bedrooms for 160 hours a month and the same room is used for sleepovers or guests c.24 hours a month. In that case the business use would be 160/(160+24) = 87%. The amount of home use has increased over last few months, so when they do annual calculations they should note down the hours they have used home office over last few months, which will help them with annual tax return when the time comes.

 

Another way would be to assume that the room is available to use 16 hours a day (awake time = 24-8) or, say 480 hours a month. If they work part-time, say 60 hours a month, that would be 60/480 = 12.5%. A very different percentage to the example above, and HMRC’s preferred method to calculate fixed costs, particularly if they work only few hours a week. Variable costs can still be calculated using the first method.

 

 

  • Based on number of rooms in the house or apartment

Hallways, bathrooms and kitchens are excluded from the calculation. If they have three bedrooms, a dining room and a living room, that’s five rooms. If they use one room for business use, they can claim 1/5 = 20%. Then they should apply business use % of the household cost discussed above.

For example, if the household costs are £20,000 a year, they have five rooms and 87% business use, they can claim £20,000 x 20% x 87% = £3,480.

 

 

  • Based on floor area

Some businesses use several rooms in their house for business, perhaps they store goods in one room but carry out work in the other. Or they use the largest room in the house for the business. They should work out the area used for business/total area of the house (except bathrooms, corridors and kitchens). Again, they need to reduce the claim by % of any private use of the area.

 

 

  • Based on time

Some people use the whole property for business and private use, usually the case with smaller properties. In that case area or room based calculation might not be practical.

There are 168 hours in a week, if they work 40 hours a week, they can claim 40/168 = 24%. If they work more, they should keep track of their hours in case of questions from HMRC.

 

 

  • Fixed rate calculation

If all of this is too much, then a simple £2 a week can be used, however that would only be £104 a year so it might be worth putting in the effort to make the calculations.

 

There is also a simplified expenses calculation if one knows rough monthly hours and wants to keep it simple. The below does not include telephone or internet expenses, where they can work out business proportion of the use separately.

 

 

The rule is:

If they have done 25-50 hours per month, they can claim £10 that month,

For 51-100 hours, claim £18 per month, and

For 101 hours or more, claim £26 per month

 

Arguably, if they have done more than 25 hours a month, they can claim more than £104 a year with latter version, so it is worth that little extra effort.

 

Limited company directors and employees

 

In order to have tax relief as an employee or a director, they must earn more than the tax free salary.

 

Allowances are less generous for limited company employees and directors. £6 a week can be claimed from 6 April 2020 and £4 a week can be claimed for periods prior to that. They do not need to keep any records if they claim the flat amount but there must be a requirement to work from home, rather than a choice. Needless to say, during coronavirus crisis that condition has been met.

 

Ways to claim:

  • They can claim up to £6/week from their employer tax free
  • If they complete self-assessment they can claim through that but it will take a form of a tax relief which will be 20% or 40% of £6/week, depending on what their tax rate is
  • They can claim online by filling in P87 through Government Gateway account

 

If one has extra expenditure as a result of working from home, that exceeds £6/week, they can only claim on variable expenses (see above) and need to provide evidence.

For example, they may have extra electricity, gas and telephone expenses during lockdown. Again, their first port of call would be to request their employer to cover these, who can claim those as tax deductible expense. Failing that, they can follow “ways to claim” steps above.

 

The calculations can be complex, several factors needs to be taken into account. The overall result should be reasonable, otherwise one can expect HMRC to ask questions. Best way is to use professional advice. If one wants to save money, they can make calculations based on what they think is right and ask an accountant to check it over.

 

If you need help with any of the issues identified above, please feel free to arrange a free chat to see the ways we can help you.

 

 

Stay well!

 

Riina Trkulja

Web: https://www.accountsassistants.co.uk

Twitter:  https://twitter.com/AccountsFriend

Linked In: https://www.linkedin.com/in/riina-trkulja-53462b14/

 

 

About us:

Riina qualified as ACA accountant when working with KPMG, then moved on to PwC due diligence practice. Her most recent job was with James Caan, the Dragons’ Den investor. She worked in his private equity business as Investment Director and also Finance Director.

 

She is a founder and Managing Director of AccountsAssistants.co.uk that supports small businesses by providing finance team outsourcing, bookkeeping, accounting and Finance Director services at reasonable rates. She also supports her clients with all the COVID related queries. She is a Fellow member of ICAEW.