Working From Home

5th June 2013

One of the most common things that we get asked about it what you can charge onto your business as a cost of working from home?

Directors

If you are a limited company you can rent a room to your business to cover the costs of working from home. The rental charge can then be offset against the profits of the company reducing the company’s tax bill.

How much to charge

The amount of rent you charge should be calculated based on the actual costs incurred. You can calculate this based on the area that you use for the business and the amount of time that you are using room for business.

As an example:

Gavin works from home; he has an apartment that has 3 living spaces. He uses one of these rooms as an office for 6 hours per day except at the weekends.
His monthly household costs are:

  • Rent £1,200
  • Electricity & Gas £200
  • Council Tax £150
  • Insurance £100

Rent, Council Tax and Insurance are fixed costs as they do not vary with the amount of usage. To calculate the business use we need to firstly divide the costs over the number of rooms.

Council Tax £150
Insurance £100
Rent £1,200
Total £1,450

£1,450 split over 3 rooms = £483 per month

We then need to look at the total number of hours in a week and compare this to the number of hours the room is used for business.

No of hours in a week = 24 hours x 7 days = 168 hours

Hours of business use = 6 hours x 5 days = 30 hours

The business proportion is therefore approx. 17.5% (30 hours ÷ 168 hours).

Business proportion of fixed costs = £483 x 17.5% x 12 months = £1,014 per year

Electricity and Gas are variable costs again we split the cost based on the number of living rooms in the house.

£200 split over 3 rooms = £66

The business proportion is worked out based on usage of the room so if we say that on average a room in the home is available for use for 14 out of the 24 hours in a day.

Available usage per week = 14 hours x 7 days = 98 hours per week

Business Usage (as calculated above) = 30 hours per week

The business proportion is therefore approximately 30% (30 hours ÷ 98 hours)

Business proportion of variable costs = £66 x 30% x 12 months = £257.

Gavin should charge the company an annual rent of £1,271 (£1,014 + £257) to cover the cost of working from home.

Not everyone’s circumstances will fit this example and there are many more examples available on HMRC’s website.

Things to consider:

  1. You must have a rental agreement in place between yourself and the company.
  2. The rental income and expenses must be reported on your personal tax return (there will be no tax to pay as the income equals the costs)
  3. If you use a room in your home solely for business with no private use this could cause tax complications when you sell the house
  4. If you work from home you should consider whether business rates may apply, check the councils website for details

If you do not wish to put a rental agreement in place you can still charge the business for the additional costs incurred in working from home such as electricity, gas and telephone calls but you cannot charge for any fixed costs that you would pay whether you worked from home or not such as mortgage interest and council tax.

Sole Traders

Sole traders may use the same calculations for their use of home but they will not need a rental agreement in place.

Alternatively new guidance for sole traders also allows for a flat rate charge based on the number of hours of business use as follows:

25-50 hours per month£10 per month
51 – 100 hours per month£18 per month
101 hours or more£26 per month.

If you would like to talk to us to find out more about the expenses you can claim call us on 01273 737307 or drop us an email.