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10th July 2008 - Cliff Brightwell - Working from home - The tax Situation

Introduction

Many self employed people work part or all of their time on their business from home.

HM Revenue and Customs have recently issued further clarification on the household expenses that may be claimed.

Many bills for household expenses cover both private and business use, but for example, a self employed person will receive only one electricity bill. The fact that it is a single bill does not mean the whole of the expenditure is disallowable. The part attributed to business use is allowable.

What is actually allowable depends on the extent and nature of the business activities undertaken.

Specific Deductions

The rules state an expense is allowable if incurred wholly and exclusively for the business. If incurred for more than one purpose it does not mean an identifiable part incurred for the business is disallowed.

Some of the types of expenditure that may be allowable include the following. We have shown them under two types Fixed Costs and Running Costs.

Fixed Costs

Some costs have to be paid whether there is business use or not:

Insurance

Council Tax

Mortgage Interest (Or Rent)

Repairs and Maintenance

If part of the home is set aside solely for business use for a specific period then a part of these costs is allowable.

Running Costs

Some expenses vary with the amount of business use. These would include the following:

Cleaning

Heat, Light and Power

Telephone

Broadband

Metered water charges

How to Apportion Business Usage

It is normally appropriate to apportion fixed costs by area and time of usage for business, and running costs with referance to the facts of their usage.

There is a tax case where the courts have stated that it is possible to apportion the costs of a room on a time basis.

It can also be done by referance to the number of rooms in a property.

So refer to the following three factors:

Area

Usage

Time

What proportion of the home is used for business purposes, how much of a particular service is actually consumed and how long is an area used for busines purposes.

NB

Please note if you are an employee the rules are different and you would need to speak to your employer about the situation.