Homeworking rules and expenses
Employees, including limited company directors
Special rules for home-working employees
To obtain tax relief for working at home as an employee, it will normally be necessary for your contract of employment to require you to work from home. Where working at home is optional, it is very unlikely that HMRC will accept a deduction for expenses.
There are special rules for employees who work from home. These cover the following areas:
- Reimbursement by employers for additional household expenses; (s316A ITEPA 2003)
- Provision of office equipment by employers; (s316A ITEPA 2003)
- Provision of computers for private use by employers (s320 ITEPA 2003)
- Travel for necessary attendance (s338 ITEPA 2003)
We shall look at these in turn, pointing out what you might claim and what restrictions there are. As before, we need to consider reimbursed expenses and non-reimbursed expenses separately.
Reimbursed household expenses
Which costs are included?
Employers may reimburse employees for the additional household expenses incurred through regularly working at home. The relief (given by ITEPA 2003 s.316A) covers, for example, heating and lighting costs, additional insurance, metered water, telephone or internet access charges. Where working at home leads to a liability for business rates, this can be included.
Costs must relate to the work area of the home. Costs that are the same, whether or not you work at home, cannot be included. Specifically this includes mortgage interest, rent, council tax and water rates.
Also excluded are costs that put you, as an employee, in a position to work at home. This would be expenses such as building alterations, furniture or office equipment. However, the employer can provide office equipment and office furniture to the employee as described below.
How much can the employer pay?
HMRC will accept reimbursements up to £4 per week (£6 per week from 6 April 2020) without the need for supporting paperwork. If reimbursements are to be a higher level, these must be justified and detailed records kept by the employee, or they must be specially agreed with HMRC.
Points to note
- The tax relief is for reimbursement of expenses. If expenses are incurred, but not reimbursed, they need to pass the stricter test outlined in the first section above and may not qualify (s.336 ITEPA 2003).
- No relief is given for occasional working at home or for informal arrangements. This excludes, for example, work done at home in the evenings or at weekends.
- To qualify, employees need some sort of home working agreement where they regularly work at home. Reimbursement by the employer is not taxable even if homeworking is by choice at http://www.hmrc.gov.uk/manuals/eimanual/eim32760.htm
Office equipment provided for homeworkers
Employers can provide the necessary office furniture, equipment and internet connections for a homeworker, without there being a liability for the employee so long as
- the sole purpose is to enable the employee to perform the duties
- private use is insignificant
This relief is given by s316 ITEPA 2003.
Working from home? (Self employed)
If you’re one of the many self-employed people in the UK who carries out work from their own home there’s some good news for you! You’re entitled to include part of the running costs of your home in your accounts, which will save you some tax. Here’s how to work out how much you can claim.
Two methods for calculating business use of home
If your business is eligible to use the new simplified accounting method you have a couple of options for working out how much to claim for business use of home.
If you’re a sole trader or in a partnership where all the partners are individuals rather than corporate bodies (so if you are in a partnership and one of the other partners is a limited company, that’s not you), you’re eligible to use the simplified accounting method. One option this method of accounting allows is a flat rate calculation for business use of home.
The flat rate method
The flat rate method simply asks you to look at how many hours a month you spend running your business at home, on average, and include a fixed amount in your accounts for business use of home.
The amount varies with the number of hours per month you work at home, as follows:
- 25-50 hours: £10 per month
- 51-100 hours: £18 per month
- 101 hours or more: £26 per month
Using this method will certainly be quicker than working out your actual costs. However, the figure might not be as high meaning that you could save time but pay more tax. It’s also important to note that the flat rate method covers only costs for heat, light and power – you will still need to work out how much you can claim for your other costs, such as rent, council tax, and telephone and broadband.
Analysing the costs method
The second method, which is the method you will have to use if your business is not eligible to use the simplified accounting method.
For example, if you’re a freelance decorator you might spend an hour or two a week writing up your books at home, but spend the rest of your working life at your customers’ properties. But if you’re a self-employed PR consultant or web designer, you may well do the vast majority of your work at home and only occasionally visit clients.
HMRC says that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost – the part that relates to you actually living there – and the business element. But how do you do this?
One method is to work out how many rooms you have in your home and identify how many of those rooms you use for business – and also calculate how much time you actually use these rooms for business.
Remember that it’s not a good idea to use any part of your home solely for business activities all the time and never use it for any private activities, because capital gains tax will then be due on the part you use just for business if, and when, you sell your home. Instead, try to make sure that your work space serves a dual purpose. For example, use an office at home as music room as well – you could prove that to a visiting HMRC inspector by having a piano in there.
Say there are 10 rooms in your home. You only use one for business, and 90% of the use of that room is for business. You would add up all the costs that you can claim and multiply that by 1/10 and then by 90%, to get the accounts figure for the business use of your home.
But what running costs in my home can you actually include in my accounts?
Here are some of the costs you might incur to run a home, which you may then be able to claim part of in your business accounts:
If you’re self-employed and buying your home through a mortgage, you can claim a proportion of the interest only – not the capital repayment.
You can’t charge your business rent when you’re self-employed, because legally you are the business. But if you’re renting your home from a landlord, then you can claim a proportion of the rent for your business.
You can claim a proportion of your council tax cost. However, depending on how much you use your home for business, you may have to pay business rates rather than council tax.
Light and heat
You can claim the business proportion of your gas and electricity costs for lighting and heating in the room(s) you use for business.
Telephone and broadband
Remember that what you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.
You can claim the full cost of all your business use of the line, and a percentage of the line rental, based on how much you use it for business purposes and how much is for personal use.
If a property repair relates solely to the part that’s used for business, you would include this cost in your accounts in full, subject to the business use of that room.
So for example, if the ceiling in your office/music room was repaired for £200, you wouldn’t need to divide that by 10 because the repair was only for that room – you would just multiply by 90%, and include that amount (90% x 200 = £180) in your accounts.
If the repair is to the whole house, for example a repair to the roof, you can include that in the same proportion as you would the rent or council tax – so in the example above of your 10-room house, the repair cost x 1/10 x 90%.
If the repair is just for a part of the house that’s not used for business – such as replastering of a kitchen – then you can’t claim any part of that repair in your business accounts.
If you use a lot of your home water supply for business – for example if you run a car valeting service – then you would need to apply to the water company for this to be separately charged, and you could claim the full cost.
But if your water use for your work is only minor, you can’t claim any of the cost for your business.
Claiming costs of working at home is not as simple as it initially sounds. If you’re in any doubt as to what you can claim, you should seek further advice from an accountant.