If you carry out some of your contract work from home, there are many benefits. There may also be some (small) pitfalls. The line between personal and work space can become blurred, and your utility bills might also start to creep up.
So, if you use a room in your house solely for contract work, it seems only fair that your limited company should pay something towards your household costs, right?
In this guide, Christian Hickmott, Managing Director of Integro Accounting discusses this frequently asked question:
Can you charge your limited company rent for using part of your home?
Well, the answer is yes, within reason. But, perhaps a better question is: should you, and is it worth your while?
There are some downsides to charging your company rent, and it isn’t something we recommend at Integro – for the reasons we explore below. A good alternative is to claim a fixed weekly rate for the use of your home for business.
Flat rate allowance or claim proportion of home use?
The alternative to charging your limited company rent is to claim expenses at either HMRC’s flat rate amount OR to claim a proportion of your household expenses.
Flat rate use of home allowance
You can claim HMRC’s £6 per week flat rate allowance for the use of your home for business reasons. The company pays this amount to the employee or director, reducing the company’s taxable profits.
This is often the preferred option for directors of a limited company, as it’s simpler and requires no receipts or calculations.
Claiming a proportion of home use
If you are working from home full time, this £6 per week amount might not cover the cost of your expenses.
In this case, you can calculate a proportion of your home expenses that are incurred in the course of running your business.
You need to keep adequate records, ideally including a copy of any calculations you make.
Interestingly, if you use this method, your weekly claim may end up being less than £6 per week.
This is because you can only take into account your non-fixed costs. These are costs that you already incur as a homeowner – including rent, mortgage payments and council tax.
You can only include allowable expenses in the calculation, such as utility bills. You then work out a proportion of these costs, based on the number of rooms in your property and the amount of time you spend on company business in these rooms.
Charging your limited company rent
Put simply, if you charge your limited company rent, this is usually done as a tax-saving measure.
Understanding which of your expenses are allowable and can be reimbursed to you personally can go some way to reducing your company’s profit and in turn, reducing its corporation tax liability.
Whether or not it is worthwhile to charge your company rent for use of a room in your home depends on how much rent you charge.
Counterintuitively, to do this, you need to keep evidence that the room is not exclusively used for business purposes.
The reason is, that if a room is used exclusively by your business, it may be deemed to be business premises – which can lead to a whole new set of questions, including:
- Do you need to inform your local council?
- Will this affect your home insurance?
- Will it affect your CGT exemption if you sell your house?
The downside of charging your limited company rent
As you can see, this isn’t an option we at Integro recommend for a number of reasons. If you do decide to go down this route, there is a lot of work involved to set it up correctly.
You will need to set up a formal agreement between you and your company, and carefully consider the following points:
How much rent can you charge?
To determine how much rent you can charge, you need to look into commercial rates of local office space to make sure you do not exceed the current market rate.
The agreement can include costs of heating and electricity, However, if the rent charged exceeds the allowable element of your current working-from-home costs, it can result in a rental profit. You – as an individual – will then be liable to income tax.
You need adequate proof of the rental arrangement between you as the property owner (if jointly owned, each owner should be named) and your limited company.
You need to produce board meeting minutes to evidence that the company’s directors have made the agreement.
Following on from an earlier point, make sure you specify whether or not the designated business area in your home is used for personal reasons too – by the household. For example, business in the day and a family room in the evening.
Remember – if your company has exclusive use of the space, you could be liable to pay CGT when you sell the property.
Check with your landlord, mortgage provider and household insurance company
It is worth notifying them where applicable if you’re renting out part of your home to your limited company.
There may be clauses in rental agreements and mortgage conditions that prohibit the use of your home for business purposes.
You may also find that you need to pay for additional insurance coverage. You may suffer additional costs to meet your insurer’s terms and conditions – such as complying with additional health and safety measures.
Your personal tax situation
When you receive rental income from your company, this will count towards your personal pre-tax income.
The rental income should be recorded on your annual self-assessment tax return/
Integro have more about this here in answer to ‘how will my rental income affect the tax I pay?’.
We have discussed all three methods in this guide, but we recommend you speak to your accountant to work out the best solution for your own company.
HMRC’s £6 a week flat is preferred by the majority of our clients.
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