As a limited company owner, you may well carry out your trade from home – occasionally, or on a regular basis. Which (if any) 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 may incur whilst running your business.
The first one is a fixed (small) HMRC allowable expense, the second involves working out a proportion of household expenses and charging it to your business. The third involves creating a formal 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 only work at home occasionally, then 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. This pre-agreed sum does not have to be authorised in any way.
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 may seem like a paltry sum, but if you claim every month, this adds up to £312 per year. A sum which ordinarily would be subject to Corporation Tax, and then personal taxes if extracted any other way.
Most contractor accountants we work with suggest that contractors go for this simple option unless there’s a compelling reason to look at claiming proportional expenses, which we discuss next.
This fixed amount applies from April 2020 onwards. Previously it was £4/£18 per week/month.
2. Claiming for a proportion of household expenses
If you use your home in a meaningful way to carry out your trade, you can claim for any expenses incurred, however, you must be able to justify any claims you make.
Unlike the rules which exist for sole traders, you can only claim for the incremental costs incurred as a result of working from home.
In other words, any costs you would have borne anyway – by the very nature of running a home are excluded. As are any costs deemed to have a ‘duality of purpose’ – i.e things which have both a personal and business use – but cannot be separated.
You can calculate this by working out the cost of allowable expenses (gas, electricity and metered water) according to the number of rooms you have 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 – as you would have had to pay for these anyway; such as Council Tax, Rent and Mortgage Interest.
You can only claim for the cost of broadband and telephone bills if the contracts are your company’s name. Unless, of course, your bills can demonstrate specific amounts were incurred purely by the business.
3. A formal contract with your own company
Alternatively, you may opt for a third option – drawing up a rental licence between you and your own limited company.
This must be a commercial agreement, based on your real working arrangements, and ‘market rent’ must be paid. With this in mind, it may be worth your while asking a local estate agent to provide you with a formal rent valuation.
You should take care when drafting such an agreement (clearly we recommend you seek the help of a professional), and be able to justify the amounts involved.
Although your company will receive tax relief on the rental payments, you will incur personal tax on the rent received when you fill in your annual self-assessment return. If you co-own your home, then when it comes to tax return time, the rent must be split according to the proportion of your home each person owns.
Things to bear in mind…
If you do decide to draw up a formal rental agreement between you and your limited company, you should bear these points in mind:
- If you have a rental agreement or a mortgage, are you permitted to use your home for business purposes?
- Would running a business from home breach the terms of your home insurance policy?
- You may lose your CGT exemption when selling your property if any part of it is deemed to be exclusively for business use.
- There is also a small chance that your property may become liable for business rates in certain circumstances.
Clearly, we strongly advise you to discuss the licencing option with your accountant first, as there are so many factors to consider. The agreement needs to be reasonable, and well-drafted to ensure you don’t unintentionally fall into a tax trap further down the line.