What are The Tax Implications of Working From Home?

July 23, 2019 Categories: Business, Business Start-ups, Cash flow, Expenses, HMRC, Tax

The number of people working from home in the UK has risen to over 4 million.

That figure was recorded at the start of 2018. If the trajectory continues, experts believe 50% of the UK workforce will be working remotely by 2020.

The idea of a commute that takes mere seconds and an office environment that is literally home-from-home clearly appeals to many. But it isn’t without its challenges.

If you’re considering working from home or providing more flexible working options for your staff, the tax implication might be on your mind.

Business expenses: a minefield or sensible guesswork?

Working from home as a freelancer or start-up entrepreneur is a sensible way to test the water in your marketplace while keeping costs and risk to a minimum.

It isn’t without its tax implications, though, and business expenses are an area worth getting your head around before deciding whether this is the best route for you and your business.

Deducting specific expenses from your turnover is a legitimate way to reduce your tax bill by offering a fair reflection on profits. However, it’s often tricky to determine which expenses count as allowable when you’re working from home.

The basic rule is any expense incurred wholly and exclusively for the running of your business is allowable, but the line is often blurred when working from home. For instance, you’ll doubtless be using your electricity bill to run the business, but does that make it an expense you can claim when it’s also used to power your TV?

Claiming the whole bill is, of course, more manageable, but could get you into trouble during a tax investigation.

Claim nothing, and you’ll be missing out on a benefit to which you’re entitled.

HMRC is thankfully pretty tolerant of sensible guesswork. The best approach is to estimate the proportion of the bill that applies to business use and only claim against that. Keeping records of your calculations is vital, however, in case they’re queried further down the line.

You can apply this to mobile phone contracts, telephone bills, and even gas and heating.

So, what else can I claim?

There’s obviously a lot more to running your home than utility bills, so what else does HMRC accept as allowable expenses?

You’ll be glad to hear we’ve exhausted their Business Income Manual, and while it’s typically thorough, there is a non-exhaustive list of the most common expenses you can claim. They include:

  • council tax
  • mortgage interest
  • rent
  • repairs and maintenance
  • cleaning
  • and metered water charges.

The same principle of sensible estimates applies as before. For instance, if the cleaner dusts and polishes the entire house, HMRC would expect you to make an estimate of how much work they undertake in your office or work space, and only claim against the corresponding portion of their bill.

It can get a little more complicated, but let’s consider a typical example.

Sarah decides to have the exterior of her house painted at the same time the dining room is renovated. Because the exterior painting is a general household cost, she can claim a proportion based on business use. The dining room, however, is not an allowable expense because she doesn’t use it for business purposes because she has a home office.

If you have business premises (for instance, if you run a surgery or solicitors), HMRC works on the assumption that you operate from there, which means you need to be sensible about any calculations you make. If you do work from home, try not to over-egg the fact!

What if I only work from home?

If you work from home for more than 25 hours a month as a sole trader, the expense claims process is a bit simpler.

However, there’s a bit of a caveat.

In 2013, HMRC introduced a flat-rate system for people who fall into this bracket. Allowing you to sidestep complex calculations, this allows claims to be made based on the following thresholds of business use per month (in hours):

  • 25 – 50 hours: £10 per month
  • 50 – 100 hours: £18 per month
  • Over 100 hours: £26 per month

However, in our opinion, those rates aren’t great, which is why it still makes sense to keep records and ask your accountant to make the correct calculations for you.

Just bear in mind this only applies to utilities and not itemised expenses such as telephone bills and broadband.

The capital gains trap: a word of warning

Depending on the size of your home, you perhaps don’t benefit from a specific, dedicated office within it. But if you do, it may have an impact on the amount of capital gains tax relief you can claim if you sell the property.

This is because you can’t classify that part of the property as a ‘private residence’, which means it falls outside the bounds of capital gains tax relief.

If you’re like most homeworkers, however, your workspace probably doubles as a guest bedroom, dining room or storage space. And that means you needn’t worry as it’s still a home!

Is it a risk worth taking?

Working from home isn’t a risk, providing you understand the tax implications and have help on hand from your accountant should any calculations be required.

The benefits of working from home are numerous, but it pays to spend time to think through the tax benefits or disadvantages you might encounter, instead of operating on guesswork.

If you’d like more specific advice on your situation please get in touch.