The reliefs employees and those who are self-employed can claim when they work from home will depend on a number of conditions.
Employees working from home
It is a condition for tax relief under section 336 ITEPA 2003 that the expenses must be incurred ‘wholly and exclusively’ in the performance of the employee’s duties. In practice that means that tax relief can only be allowed for:
- the additional unit costs of gas and electricity consumed while a room is being used for work
- the metered cost of water used ‘in the performance of the duties’ (if any). As regards water rates no tax relief would be available
- the unit costs of business telephone calls (including ‘dial up’ internet access).
From 6 April 2012 HMRC will normally accept that employees who satisfy the conditions for relief are entitled to a deduction of £4 per week (or £18 per month) for each week/month that they are required to work at home, without having to justify that figure.
Employees who wish to deduct more than £4 per week (or £18 per month) will be expected to keep records and to be able to show how their figure has been calculated.
Before 6 April 2012 lower weekly figures were allowed as above; these amounts were £2 per week for 2006/07 and 2007/08 and £3 per week for 2008/09 to 2011/12.
For 2006/07 the following expenses are not treated as allowable for employee tax purposes, because the employee will be required to make the payments whether or not they are working from home:
- council tax (rates)
- rent
- water rates
- mortgage interest/endowment premiums
- insurance for the property or its contents
HMRC will usually accept that an employee is entitled to claim allowable expenses under section 336 ITEPA 2003 if all of the following conditions apply:
- the duties that the employee performs at home are substantive duties of the employment (these are duties that an employee has to carry out and that represent all or part of the central duties of the employment)
- those duties cannot be performed without the use of appropriate facilities
- no such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect him or her to travel to those premises on a daily basis)
- at no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.
Self-employed working from home – simplified expenses
Self-employed can calculate their allowable expenses using a flat rate based on the number of hours they worked from home each month. This simplified method can only be used if the person works for 25 hours or more a month from home. The allowance is a flat rate based on the number of hours worked from home each month as follows:
Hours worked at home per month Flat rate allowed per month
25 to 50 hours £10
51 to 100 hours £18
101 hours or more £26
If the flat rate allowance is used, this is instead of taking the proportion of expenses relating to the home. Although even if the flat rate is used the self-employed person can also claim telephone and internet costs which relate to the business.
The flat rate allowance may vary throughout the year if the self-employed person works for different hours in his/her home from month to month.
For example a self-employed person may work from home for 20 hours per month for three months, for 30 hours per month for four months and for 55 hours per month for five months. The total flat rate allowances which can be claimed would be £0 x 3 plus £10 x 4 plus £18 x 5 being £130 in total for the year.
Simplified expenses (if living at your business premises)
Some self-employed people use the business premises as their home (eg a guest-house, bed and breakfast, care home etc.). There is a simplified method of determining the business expenses based on the number of people living in the household of the self-employed person.
The total costs of running the premises are determined then a flat rate is deducted for ‘personal use’ and the balance can be claimed as a business expense. The flat rate deduction is based on the following table:
Number of people in household Flat rate per month
1 £350
2 £500
3 or more £650
Example
Mr X is self-employed and his business is running a care home. He lives in the care home with his wife and son for 10 months of the year, and he lives in the care home for the other two months of the year without his wife and son.
The total costs of running the premises (such as light and heat, insurance, repairs, security etc.) for the year is £25,000. The personal use based on the flat rate system is £650 x 10 plus £350 x 2 which is £7,200 for the year. Therefore the business use which can be claimed by Mr X is £25,000 less £7,200 = £17,800.
General rule, apportioning the expenditure
The general tax rule is that an expense is only allowable as a deduction for self-employed purposes if it is incurred ‘wholly and exclusively for the purposes of the trade’.
Wholly and exclusively does not mean that:
- trade expenditure must be separately billed, or
- part of the home must be permanently used for trade purposes and not used for any other purpose at any other time.
Wholly and exclusively does mean that when part of the home is being used for the trade then that is the sole use for that part at that time.
In many cases there is more than one method of arriving at a reasonable apportionment, although some methods may be more appropriate for a particular type of expense. The following are some examples of expenditure and methods of apportioning those costs.
In general, fixed costs relating to the home can normally be apportioned based on area and time; these would include insurance, council tax, mortgage interest, rent, repairs and maintenance. Also consider:
- insurance can usually be apportioned on an area and time basis. However, if the trade is covered by a separate policy that cost is allowed in full
- council tax or business rates can be apportioned between business element and non-business element on an appropriate basis
- mortgage interest can be claimed if part of the home is used solely for the trade, then it could be apportioned on an area and time basis. Repayment of capital is not allowed. If profit is computed using cash basis, the maximum that can be claimed each year is £500 for interest and costs of obtaining finance
- rent can be claimed when the home is rented from a landlord and part is used solely for trade purposes. This would usually be on an area and time basis. An individual cannot charge rent to his/her own self-employment business
- repairs and maintenance that relate solely to part of the house that is not used for the trade are not allowable. Although if a room is used solely for trade purposes, then the cost of redecorating that room could be wholly allowable. General repairs and maintenance (such as repairs to the roof) could be apportioned on an area and time basis
- cleaning may have an apportionment based on the facts. For example a trader may ask the cleaner not to clean the office area of his/her home in which case none of the costs would be allowable. Alternatively, the trade may require specific cleaning requirements in which case a higher proportion of the costs may be claimed, if justifiable
- heat, light and power can be apportioned on a reasonable basis. The apportionment should reflect the actual usage. If a room is used partly to write up records then an area and time basis may be appropriate, whereas if specialist equipment is used which requires more electricity a higher proportion may be allowed
- metered water charges may be allowed in cases of heavy usage for the trade, whereas for minor trade use, such as writing up books, none of the water charge would normally be allowable
- telephone costs for business calls are allowable. A proportion of the line rental (based on the ratio of trade use to total use). Some packages are all inclusive of telephone, broadband and possibly television in which case a reasonable apportionment should be allowable for the business use of telephone and broadband; in most cases the costs relating to the television will not be allowable
- broadband/internet connection costs are allowable to the extent that the service will be used for business purposes. An apportionment similar to the telephone usage basis should be used.
Possible effect on CGT private residence relief
If part of the home (property or grounds) is used exclusively for the purposes of a trade or exclusively for the purposes of employment this would reduce the capital gains tax private residence exemption when the property is sold. The reduction in the private residence exemption would not be required if the part of the home which is mainly used for business purposes is also used for non-business purposes from time to time.
For example, an accountant may have an office at his/her home which is used for business purposes. The office has a telephone (either landline or a mobile device) and the accountant makes both business calls and non-business calls from the office. In this example it could be argued that the office is not used exclusively for business purposes and therefore there would be no need to reduce the private residence exemption for capital gains tax purposes.
HMRC has information on this subject in its manuals as follows:
Specific deductions: use of home: contents
Simplified expenses: use of home for business purposes
Simplified expenses: private use of business premises
Deductions: expenses other than travel: table of contents: expenses from F to Z
Article from ACCA In Practice