Home working and claiming the costs
Employees and Directors (as employees) are permitted to claim costs of for working at home from their employer tax free. HMRC’s own manuals instruct their tax officers to accept all reasonable claims for minor use of home.
As a rule only costs that have increased as a result of home-working are allowable. To keep things simple, HMRC allows a flat £4 per week, or £18 per month (excluding business telephone calls) which can be claimed back from the company, without the need for any receipts.
Alternatively a claim can be made for a limited number of expenses, as long as they are not for services already being provided for personal use, or for dual purpose (eg broadband line shared by the household as well as the business).
If an employee is not reimbursed by the employer, then the employee may make a claim on his personal tax return, but only where working from home is necessarily in the performance of duties for employment. HMRC have various criteria which must be met including the provision that there can be no element of choice. Where there is an element of choice, the ‘necessarily’ test fails. So the arrangement is always best documented in the employment contract.
So there are three options for claiming back expenses open to employees and directors working from home:
- Flat £4 per week, or £18 per month
- Claim for actual costs, which may include:
- Metered light and heat
- Calls made on your home telephone
- Insurance, if there is business equipment insured under that policy
- Repairs if incurred on business equipment
- ISP/broadband costs, if dedicated to the business
- A proportion of the cleaning costs of your workspace, if the work is of the type that requires extra cleaning.
- In order to establish the proportion of household costs used by the business, work out the percentage of your property which is used for business purposes, what proportion of a utility bill that can be apportioned to business use (e.g. lighting or heating), and for how long each day the service is used for solely business reasons (for example, the business area only needs to have lighting for 50% of the day).
- Costs must be incremental ie they have increased as a result of the business activities being performed from home. Costs that are explicitly excluded are:
- Mortgage interest or rent
- Water rates
- Expenses that do not have receipts i.e. cash wages of a cleaner.
3 .Renting out your property to the business
Alternatively the employee may be able to rent out part of the property to the employer. This will allow tax relief on mortgage interest and council tax. This needs careful planning and Beans will help explain the potential advantages of this approach in a lot more detail.