On August 15th 2014, the government announced a new set of measures that will make it easier for people to run businesses from home. The planned legislation will allow people to run businesses from rental properties, remove the need (in most cases) for planning permission, and – importantly – release most home-based businesses from any potential liability for business rates.
With 2.9 million home-based businesses contributing £300 billion to the economy each year, this news is a welcome boost. So, whether you already run a business from home or are just thinking about doing so, what’s the best way of organising the financial side of the arrangement?
The easiest option is simply to reclaim expenses from your company. The other is to charge rent to the company. Here’s a summary of how each of these works.
As a Director, you can reclaim expenses from your business if you have to work from home. You’ll have to be able to justify the need for home-working. The most common justification is that there is nowhere else to work; others could include having to provide services or do background work such as software updates out of hours. If you only have to work from home some of the time, it’s worth keeping a diary of what you do to prove to HMRC if necessary that the work is substantive.
Providing you have a clear case for needing to work from home, you can reclaim up to the standard home working allowance of £18 a month without keeping a detailed record of expenses or providing receipts. Above that, receipts will be needed.
What you can claim for
Allowable expenses include:
• A (reasonable) proportion of metered heat and light.
• Business calls made on a home phone.
• The cost of insuring business equipment,
• Repairs to business equipment.
• ISP/broadband costs (if the contract was taken out for business use).
• A proportion of cleaning costs where work is of a type that necessitates extra cleaning.
Make sure you submit claim forms and receipts if applicable monthly or quarterly, and ensure you get a payment back. Don’t pay any of the domestic expenses through the company, as this then becomes a benefit and liable for income tax and national insurance. It’s fine however for the company to pay directly for company-specific services such as broadband or a phone line.
If you supply your own business equipment and shelving, you can claim capital allowances on these items.
What you can’t claim for
Expenses you can’t claim for include:
• Mortgage interest or rent.
• Water rates.
• Expenses without receipts e.g. a cleaner’s cash wages.
• Redecoration of a home office.
Charging rent to the company
If you rent out part of your property to your company under a licence agreement, you can then claim tax relief on mortgage interest and council tax. Remember though, that you will then have to declare any rental profit on your personal tax return. Any rent charged should be reasonable in relation to local market rates and reflect your legal responsibility as a director to act in the best interests of the company.
Charging rent can be a good option if the numbers work out; and there is also the possibility of reclaiming VAT on the cost of building work done for business use. Any such claim will, however, be blocked if you also benefit from the building work in a personal capacity.
Please note that the rules for self employed people differ to that of directors.
If you’re not sure you are getting the maximum benefit from your home office arrangements, we’d be happy to help. Just email me here or give us a call on 01625 869712