Lee Sharpe offers some examples and practical tips on obtaining tax relief for the costs of working from home.
There are various routes to offsetting the additional cost of working from home. This article sets out the basic points to obtaining a tax deduction.
It is probably fair to say that HM Revenue & Customs (HMRC) firmly believes that in almost all cases, claims will be modest – a few pounds a week. But larger claims can be made in the right circumstances.
Employed or own business?
Many readers will know that employees generally find it harder to claim tax reliefs than taxpayers in business on their own account.
The main reason is that employees have also to prove that the expenditure was necessarily incurred in the performance of their employment duties – this does not apply to the self-employed. It is a test which is deceptively easy to fail, since HMRC says the expense must be necessary, and be part of the employee’s duties. For more details, see HMRC’s Employment Income manual at EIM31630 (www.hmrc.gov.uk/manuals/eimanual/EIM31630.htm)). This disparity is highlighted in the different regimes for use of home, as we shall see below. In fact, some tax advisers argue that taken literally, the bar is set impossibly high for employees.
1. People with their own business:
This applies to:
- sole traders/partners; and
- people with property businesses.
The key test is that the expenditure must be incurred ‘wholly and exclusively’ for the purpose of the business. A simple example would be buying a book of stamps for mailing business correspondence. But what about other expenses, particularly in the context of the home: which household expenses are incurred ‘wholly and exclusively’ for the business?
‘Wholly and exclusively’ vs apportionment:
The legislation does, in fact, allow a claim for an identifiable part or proportion of an expense, which is incurred wholly and exclusively for the purposes of the business. HMRC accepts that expenses can be split between deductible and non-deductible elements. There is general guidance on the principles in HMRC’s Business Income manual at BIM3700 onwards, and specifically on use of home at BIM47810 – see also HMRC’s Property Income manual at PIM2074).
Let’s take three simple illustrative examples:
Example 1 - Designated home office:
Bill is a self-employed software developer and has a £100,000 mortgage on his 4-room apartment; his repayments are £1,000 a month (interest only) and one of those roughly equal-sized rooms is a designated home office. He should therefore be able to claim £250 of his interest payments as ‘use of home’.
Trap:
Bill cannot claim a quarter of his interest costs if he also uses the room for private purposes to a tangible extent, although so long as use is almost exclusively business-related, the full claim should be allowed. But he should ensure that his home office room is occasionally used for private purposes – otherwise he could lose a quarter of his ‘only or main residence’ capital gains tax exemption, when he sells his flat.
Example 2 - No designated part/exclusive use:
Jill is a freelance translator and spends most of her day away from home, but checks her business e-mails on her laptop at home on the sofa, while her husband watches the television. Since the room is being used simultaneously for business and private purposes, no proportion of the fixed property costs is deductible. If instead she packs hubby off to a separate room, she may be able to claim a small proportion based on the amount of time the room is used only for business purposes. She may also be able to claim for any additional Internet/electricity costs.
Example 3 - Representative percentage:
Phil is a partner in a firm of solicitors. He has no business line at home, but calculates that a quarter of all calls relates to work. He could go through all his bills and identify the cost of each business call, or he can claim 25% of his total call charges (and line rental) as a realistic approximation.
An easier way? (own business):
HMRC’s Business Income manual (at BIM47820) outlines several costs which may be part of a specific claim:
- Mortgage interest/rent;
- Insurance, council tax;
- General property repairs; and
- Utilities.
Alternatively, HMRC has for several years allowed circa £2/3 a week as a reasonable estimate, perhaps on the basis that such an amount is too small to challenge.
Since April 2013, unincorporated businesses may like to use the new ‘simplified expenses’ regime, which provides:
Hours worked from home Flat rate claim per month
25 or more £10
51 or more £18
101 or more £26
But someone like Bill (see Example 1) could potentially claim significantly more.
2. Employees (including directors):
As mentioned above, the rules for employees are more onerous. There is an added hurdle that working from home must form part of the employment duties – employees must be explicitly required to perform key aspects of their work from home, with no option to use alternative facilities at the employer’s workplace. This could apply to a regional sales executive located at the other end of the country to his office, or to a gas fitter whose only local ‘office’ is a parts depot.
Employee homeworking claims:
Even if the employee or director satisfies HMRC’s strict criteria, the scope for a meaningful tax deduction is severely restricted: HMRC allows no apportionment of costs in the way that the self-employed can claim, so an employee is limited to:
- additional metered heat and light;
- additional metered water (if any); and
- additional metered telephone/internet costs.
A deduction is only possible to the extent that the additional cost can be directly tied to the employment duties performed at home.
An easier way? (directors/employees):
Here again, HMRC allows a modest deduction without detailed evidence of actual expenses: currently £4 per week, or £18 per month (HMRC’s Employment Income manual at EIM32815 refers).
An alternative – homeworking arrangements:
The employer can arrange to reimburse the employee, tax/NIC-free, for additional costs incurred under ‘homeworking arrangements’, where the employee regularly/frequently works from home by agreement (this does not cover occasionally taking work home or similar). Again, HMRC will not challenge £4 a week or £18 a month. Crucially, these can be voluntarily agreed.
Trap:
The employer must reimburse the employee(s); it can be received tax-free but cannot be claimed as a tax deduction.
An alternative – rental agreement:
We were recently asked if shareholders could claim ‘use of home’ expenses. Generally they cannot, since dividend income does not constitute a business against which such expenses may be set. But a director (or other employee, if appropriate) could draw up a rental or licence agreement with the employer such that a rental business proper is created – expenses can then be claimed in line with the broader regime for those in business on their own.
The employer must be able to justify the payment in terms of the use and value of the space/room it uses. Likewise, the landlord will need to justify the proportion of expenses he or she claims (and here a ‘mere’ shareholder will have difficulties: what activities does a shareholder undertake at home?).
Practical Tip:
HMRC’s approach to ‘use of home’ expenses could perhaps be described as ‘stingy’ but there are opportunities to maximise the reliefs available – although do be careful that the claim cannot easily be challenged as excessive.
Property income is NIC-free.
Don’t forget that the employer can normally fund the cost of equipping a home office, without a taxable benefit – so long as it is provided for the sole purpose of fulfilling the duties of employment, and any private use is insignificant.
