Limited company directors and working from home expenses

Many limited company owners work from home, either regularly or occasionally. But which household expenses can you legitimately claim against your company’s tax bill?

Broadly speaking, there are three ways to account for home working expenses you incur while running your business.

• Claim a fixed (small) HMRC allowable expense
• Work out a proportion of household expenses to charge to your company.
• Create a formal rental agreement between you and your company.

Here, we explore the benefits and limitations of each option.

1. Use of home expense which does not require justification

If you regularly work from home under a homeworking arrangement with your company, HMRC allows your company to pay you nominal expenses to cover the general costs you may incur.

Your employer (your own company) can currently pay you (the employee) £26 per month or £6 per week to cover ‘use of home’ costs. You don’t need pre-authorisation or to provide receipts to make this claim.

You can read the precise details in EIM01476. HMRC states:

We would expect that £6 per week would be sufficient for most cases, particularly where the additional costs are only for heating and lighting the work area.

On the surface, this seems like a paltry sum, but if you claim every month, this adds up to £312 per year. That’s £312 your company can pay towards your homeworking costs, tax-free in your hands where the exemption applies, while the company can normally deduct the cost in calculating its taxable profit.

This fixed amount applies from April 2020 onwards. Previously, it was £4/£18 per week/month.

Most accountants we work with suggest that clients choose this simple option unless there’s a compelling reason to claim proportional expenses.

We look at these alternatives next.

2. Claiming a proportion of household expenses

If you use your home in a meaningful way to carry out your trade, you can claim the additional household costs you incur as a result of working from home.

Unlike the rules that apply to sole traders, you can only claim for the incremental costs incurred by working from home.

In other words, exclude any costs you would have borne anyway – by the nature of running a home.

The same applies to expenses with a dual purpose – costs used for both personal and business purposes and cannot be separated.

You can calculate the proportion by adding up the cost of allowable expenses (gas, electricity and metered water).

Then, calculate the number of rooms in your property and the amount of time you spend working in them.

However, as a limited company director, you can’t claim for any fixed costs. These include mortgage interest, rent, and council tax bills. You have to pay these costs anyway out of your personal income.

You can only claim for the cost of broadband and telephone bills if the contracts are in your company’s name. Unless, of course, your bills show specific amounts incurred purely by the business.

3. A formal contract with your own company

Alternatively, you can choose a third option: drawing up a rental licence between you and your limited company.

This must be a commercial agreement, based on your real working arrangements, subject to ‘market rent’.

With this in mind, why not ask a local estate agent for a formal rent valuation?

Take care when drafting such an agreement (we recommend seeking professional help) and be able to justify the amounts involved.

Although your company receives tax relief on rental payments, you will pay personal tax on the rent you receive at self-assessment time.

If you co-own your home, split the rent according to each person’s share of the home.

Things to bear in mind…

If you decide to draw up a formal rental agreement between you and your limited company, consider these points:

• If you have a rental agreement or a mortgage, are you permitted to use your home for business purposes?
• Does running a business from home breach the terms of your home insurance policy?
• You may lose Private Residence Relief when selling your property if any part is deemed exclusively for business use.
• There is also a small chance that your property may become liable for business rates in certain circumstances.
• If you rent office space, this is usually a legitimate company expense.

We strongly advise discussing the licensing option with your accountant first, as there are several factors to consider.

The agreement needs to be reasonable and well-drafted to ensure you don’t unintentionally fall into a tax trap later on.