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Working from home and expenses

If you are running your business as a limited company, you can claim a proportion of your home costs, including:

  • Mortgage interest
  • Rent
  • Council tax
  • Utilities (Gas/Electric/Water)
  • Broadband
  • Repairs

As the company and the home owner (you) are separate legal entities it is required to draw up a rental agreement to demonstrate that the company is renting a room from you. We can assist in drafting this short rental agreement.

How do I calculate the proportion of home costs?

To demonstrate, we will use an example:

(i) Calculate the total cost (in this example – monthly)

  • Mortgage interest/rent £600
  • Council tax £220
  • Water rates £25
  • Insurance £20
  • Broadband £20
  • Electricity & Gas £130
  • Repairs £55
  • Cleaning £40

TOTAL £1,110

(ii) How many rooms are in your house and how many are used “wholly and exclusively” for the business?

  • Total number of rooms 6
  • Rooms used for business 1

PERCENTAGE 16.67%

(iii) How many hours each day is the room used for business?

It is used on average 6 hours. The daily usage is therefore 6/24.

PERCENTAGE 25%

(iv) The total cost that can be charged to the limited company will be £1,110 x 0.1667 x 0.25 = £46.26

With the rental agreement in place what does this mean for you and your business from a tax perspective?

(a) Personal tax return (SA100)

There is no extra tax to pay. You will have to disclose this rental income on your personal tax return i.e.

  • Rental income £555
  • Expenses £-555
  • Profit £0

(b) Limited company

The rental expense of £555 is an allowable expense for corporation tax i.e. corporation tax reduction of £555 x 20% = £111.

(c) Principal Private Residence/Capital Gains Tax

Provided the room(s) are not being used exclusively for business use there will be no capital gains tax implications. The working hours would need to be stated in the rental agreement e.g. it is used for 6 hours per day.

Flat rate – minor use of home

As an alternative to the calculation above, if the home is being used for occasional business use, the employer can make a payment to the homeworking employee of £4 per week (£208 per year) without the need for any receipts or the calculation as detailed above.

Summary

  • If you occasionally work from home, the limited company can pay the employee £216 per year (£4 per week). This is allowable in the corporation tax return;
  • If you regularly work from home, you will need to:
    • Draw up a rental agreement
    • Undertake the calculation above (and retain receipts of the expenses & the calculation). The limited company would then pay the employee the calculated amount
    • The employee will need to include the rental income (offset by expenses) in their personal tax return (SA100)
    • The limited company would include the home working costs in their corporation tax return as an allowable expense