How much of my use of home as office can I set against tax?

With the recession, many people have become self-employed in the past couple of years.

Many of these start-ups have begun in bedrooms and study rooms.

Other, successful businesses are still being carried out from home after several years' trading.

H M Revenue & Customs (HMRC) provide a tax deduction for those who do not rent office space, or who rent office space and also carry out some business at home at the same time.

If the work carried out at home is a small proportion of the whole business activities, such as compiling the paperwork for the accountant or the bookkeeper or making some business phone calls in the evening and weekends, HMRC allow a reasonable estimate without having to provide much detail on the basis of the estimate.

However, if the business has all or the majority of the work being carried out at home, there is a rule tto be adhered to for an expense to be considered allowable for tax purposes.

The rule is that the expense must be ‘wholly and exclusively for the purpose of the trade’.

This does not mean that certain expenses, such as rent and utility costs, cannot be considered as business expenses because they are not wholly and exclusive to the business. In these cases, apportionment is required.

Factors to consider when apportioning costs such as utility bills are:

1. How much of the home is being used for business, is it one room in the house or a specific area of an open plan house?

2. For how long is this area in the house being used for business, is it 7 working hours like in an office, or more or less?

3. Can you separately measure the use of the utility or the rent? Sometimes if there is a meter, this can be simply measured.

Fixed costs, such as rent, mortgage payments, home insurance and council tax are allowable subject to certain criteria.

Rent and council tax can be apportioned according to the above factors, the apportioned business use is then not considered to be income for the individual.

Only the apportioned interest element of the mortgage payments are allowed. The capital element of the repayment  is not allowable..

If the business requires separate trade insurance distinct from the home insurance, the home insurance is not an allowable expense as the seperate business expense is wholly allowed. If there isn’t separate business insurance then the home insurance is apportioned. 

An apportionment of repair costs to the whole property is allowed. However if the whole house apart from the room/area used for business is redecorated then this cost is not allowed for business purposes, likewise, if only the room/area used for business is redecorated then the whole of this cost is allowable for business.

Various other running costs can be apportioned. However, the apportionment will differ according to the specific trade. For example, if a business uses  alot of electricity to carry out its trade then the apportionment of the electricity bill will be more business use than personal use. Similarly, the water charges may be apportioned so there is more personal use than business use.

Tags: business expense, home office, use of home