As we continue to adapt to our ‘working from home’ and become accustomed to the major changes in the way in which we go about our day-to-day activities, the result has affected our usual business operations. We are all too aware that it is no longer business as usual for at least the foreseeable future. This blog looks into the incentives and reliefs that are available to UK businesses as they endeavour to adjust to this (dare I repeat the phrase) new normal of public social distancing and remote working.
Whilst working from home is a brilliant opportunity to spend more time with family and get a better work/life balance, the consequence of a full household during periods in which it would usually be empty may bite when the next utility bills come through the door. The good news is that HMRC provides some incentives, or at least some compensation, for home workers. This may take the form of recognising some of the extra usage of utilities at home as legitimate business expenses and allow an appropriate deduction against taxable income or profit.
It is a condition that, in order to claim for tax relief, all expenses must be incurred “wholly and exclusively” for businesses purposes, or “in the performance of” your duties as an employee. Try not to get caught out; always be aware of the concept of duality of purpose. Simply put, proceed with caution on expenses that would have been incurred anyway, regardless of whether or not you are working. HMRC are quite clear in that expenses need to be wholly and exclusively related to the business. With this in mind, let’s say you were to claim expenses for heating your home, HMRC could argue that you would be paying to heat your home anyway. There have been real-life cases where individuals who are working from home have had an HMRC representative highlight this duality principle upon seeing children’s toys scattered around the ‘work area’.
When it comes to these aforementioned costs (such as heating), you will need to find a reasonable method of dividing up these costs between business and personal. This is commonly done by either considering the number of rooms dedicated for business use and/or the amount of time you spend working from home.
You’re probably thinking that this is all an absolute minefield – it is! This is why HMRC often gives their ‘HMRC-approved’ rates for businesses and individuals to use. You can rest easily knowing that HMRC are not going to dig heavily for evidence to justify these claims. These rates also drastically ease the administrative burdens of increased record-keeping, calculations and estimations. However, they are often somewhat unremarkable. That being so, the benefits of taking on more admin in order to claim a higher amount may be beneficial for some. Prudency is rather important in this respect.
Take into consideration when reading that this is not an exhaustive list of what is and what is not allowable expenditure. Even HMRC themselves do not have this information in such detail. What is allowable depends on the facts in each case. Nor is this an exhaustive list of all tax reliefs available spread across the wide spectrum of taxes. It would be best to discuss your specific circumstances with your accountant.
HMRC are unlikely to challenge any reasonable claim where there is minor use of home. As a self-employed person, a reasonable claim would be £4 per week. Claims can be higher than that, though this may require justification in order to appease HMRC if they should come knocking on your door (recommended documentation to retain would include invoices, receipts, bills…).
The likelihood of success when claiming more than the ‘HMRC-approved’ £4 per week may also depend on just how much of your house you use for work, what proportion of telephone calls are for business purposes, the cost of utility bills and what apportionment of these costs are pertinent to your business activity. Does your work require the use of high energy-consuming machinery? Make sure your electricity apportionment to business activities is appropriate. Lots more helpful information can be found on the government’s Business Income Manual. Search for BIM47825.
The self-employed and business partnerships could instead calculate their allowable expenses using a flat rate based on the hours worked from home each month. Again, these are HMRC approved rates and generally would not be queried by HMRC. You would still be strongly advised to only claim for the appropriate amount.
|Hours of business use per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 or more||£26|
The flat rate does not include telephone or internet expenses.
As touched upon above, a sole trader may decide to claim either all or a proportion of actual costs if they believe they can justify claiming more than the HMRC-approved rate. A sole trader may claim all of any costs that are exclusively incurred for business purposes, as well as a proportion of costs related to running the home, such as:
These costs must have been incurred by yourself and not a spouse or partner. You would need to find a reasonable method for dividing these costs between business and personal in a way that would be acceptable. There are no rules necessarily. It largely comes down to a reasonable judgement.
Some examples can be found on the following link: https://www.gov.uk/expenses-if-youre-self-employed
Here is a link to the government’s expenses checker. Use this checker to work out which method is best for you; the flat-rate or actual cost scheme: https://www.gov.uk/simplified-expenses-checker
You may be assessed for business rates if the business is large enough.
An employer is allowed to provide employees with all equipment, tools and accommodation (not including domestic accommodation) that they need to do their job. This does not include the provision of cars or boats.
Self-employed individual constructs an outbuilding in the garden to use solely as an office
As we now know, a self-employed person will be able to claim a reasonable proportion of their fixed costs such as mortgage interest, rent and council tax, as well as running costs such as light and heat, and all costs that are incurred exclusively for business. A separate meter for the outbuilding and a separate telephone line will make apportionment of the costs far easier.
There are various things to consider when looking at the tax consequence of an outbuilding. These are discussed a little bit further in point 5.2., and the VAT implications are discussed in 5.1.
In this case, the simplified expenses scheme requires you to work out the total expenses for the premises and then deduct the appropriate amount below to account for your personal use of the premises. This is based on the number or people living on the premises:
|Number of people||Flat rate per month|
Once you have subtracted the applicable amount from your total premises’ expenses, claim the rest as your business expense.
The rates from point 1 (self-employed individuals) of £4 per week use of home as office and the flat rate deduction also apply for limited companies. The flat-rate deduction is similarly based on the number of hours spent wholly and exclusively on core business activities in the home. These include:
On the other hand, a business may claim a proportion of actual costs, such as council tax, mortgage interest and insurance, providing an identifiable proportion can be attributed to business use. The same goes for running costs (utilities, broadband, cleaning…). This estimation would need to be fairly prudent. For fixed costs, it would normally be appropriate to apportion these expenses by area (approximate surface area of your dwelling used solely as your workspace) and time spent working within this space. It is especially important to be aware of duality of purpose when looking at your fixed costs.
For running costs, it would need to take into account the facts. There are obvious differences in what you may acceptably claim for electricity when comparing an office used for typing up records and an office in which there is substantial use of a professional-sized photocopier. Further detailed explanations and examples can be found on government’s Business Income Manual. Search for BIM47820.
It is a condition that, in order to claim for tax relief on the tax return, expenses must be incurred “wholly and exclusively” “in the performance of” the employees’ duties. The employee must also have been required by their employer to work from home, and not just doing so on your own volition.
Of course, measuring exactly how much extra water (if metered) or electricity consumption is attributed directly as a result of working from home has its obvious difficulties. Another thing to contend with is the concept of duality of purpose. HMRC are quite clear in that expenses need to be wholly and exclusively related to the business.
In terms of HMRC-approved rates, as an employee who is working from home at the request of your employer, the scheme allows you to claim tax relief on your income of £6 per week (£26 per month for monthly paid employees). You can ask your employer to do this by deducting this amount from your taxable income. Alternatively, your employer can pay you (reimburse you) £6 per week (£26 per month) tax free. You can check to see if you are eligible for this using the link below:
To claim more than the £6 per week against tax and NICs on the tax return, employees will be expected to keep records and show how this has been calculated. The rules are stricter than for the self-employed. Flat charges that need to be paid irrespectively (council tax, rent, mortgage interest, etc.) are not allowable as an expense in the case of employees doing their work at home. Claims are limited to metered use of light and heat and itemised phone calls (broadband would be used both for business and privately, so would not be allowable). More information can be found in the government’s Employment Income Manual. Search for EIM32815. Remember that, in order to do this, you must have been required to work from home.
If an employee is working from home on a voluntary basis, then they may claim the additional costs of working from home from their employer (not on a tax return). Alternatively, they may be reimbursed the approved rate of £6 per week. No claim will be possible where the employer does not reimburse expenses. The reason being that the costs are not being necessarily incurred as the employee has chosen to work from home.
Alternatively, an employee may claim the additional costs of working from home from their employer in order to avoid having to include these expenses on a tax return.
All payments made to an employee from their employer are regarded as being taxable income unless specifically exempt from tax, or they are being paid as a reimbursement for allowable business expenses. See point 5 (on directors) for information on this. Directors and employees are largely treated in the same way.
COVID-19 – Special measures: Purchase of equipment. Announced by the Financial Secretary to the Treasury on 13th May 2020
“To support employees who are working from home and need to purchase home office equipment as a result of the coronavirus outbreak, a temporary tax exemption and National Insurance disregard will come into effect to ensure that the expense will not attract tax and NICs liabilities where reimbursed by the employer. The expenditure must meet the following two conditions to be eligible for relief:
This exemption will be in effect until the end of the 2020/21 tax year.
Directors may either claim the £6 per week home working allowance from tax and NICs, or they can claim based on actual costs from their company. Directors are essentially treated in the same way as employees and so mortgage interest, rent and water rates are not allowable. Costs that are allowable include:
Reclaiming all of their home working expenses from their company means that it will not be necessary for the director to make a claim on their tax return.
If the director is providing their own equipment for use in the business, they may claim capital allowances on their costs.
The company can provide all the goods and services required for the director (or employee) to perform their professional duties. A tax benefit could be applied if specific criteria is not met. The criteria are the following:
The business (or employer) is allowed to provide the following, not exhaustive, list of items:
Specific items that are not allowable and so therefore the provision of which will give rise to a taxable benefit includes motor vehicles, boats and aircraft as well as any kind of building work whether it be extensions, conversions or alterations to living accommodation or the construction of outbuildings.
The provision of one mobile phone will not give rise to a taxable benefit providing that there is no transfer of ownership, not physically connected to a landline and not used only as a wireless extension to a landline
A director of an incorporated company may decide to enter into a licence agreement with the company for non-exclusive use of an office in the director’s house. The company will then pay the director rent and the director will claim all expenses under self-assessment. The director will then essentially be running their own commercial property letting business and so this will enable you to claim an appropriate portion of fixed and running costs.
Your company may be able to reclaim VAT on certain building works that it does to your property. However, this avenue may not be a sensible choice as any claim will be blocked if there is any kind of personal benefit from it. Change of use from business back to private will also create a taxable self-supply.
It is possible, as an individual, to register for VAT and opt to tax if you are renting a commercial building to your business (ie the business has exclusive use of a shed/garage/loft conversion as an office). You can reclaim VAT on conversion costs and the business is charged VAT on its rent payments to you. VAT will need to be charged, however, on a later disposal. This means the benefits are pretty much limited to the ability to reclaim VAT on expenses at the beginning of the project.
There are possibilities to transfer the commercial property and a going concern where no VAT is then charges. This depends on a particular set of circumstances.
2. Office in the garden
Rather than making use of the limited space within your home as an office, you may decide to either purchase a structure to house an office in your garden. Maybe you will even build one yourself. Unfortunately, this item would count as a structure from which your business operates as opposed to a piece of equipment held for use in the production or supply of goods or services, and as such, neither the cost of building, nor the purchase price of a ready-made office will be tax deductible.
There are also many tax consequences for the director to consider:
On the bright side, equipment and furnishing for the garden office will be tax deductible (and capitalised where appropriate) as normal. This includes things such as computers, desks, chairs, curtains, etc.
Utility costs such as lighting and heating the garden office is also tax deductible. If the outbuilding has running water and is separately metered from the household, then this is very easily distinguishable as a business expense. Essential repairs and decoration/redecoration costs to make the office a more pleasant setting for clients would also be deductible as business expenses. Capital allowances can be claimed on thermal insulation, despite this forming part of the structure.
The situation with regards to VAT is the same as it for the office conversion within the household as per point 5.1. Also note that there are also some home working arrangements which may lead to a partial reclassification of a domestic property and assessment on business rates.