One of the most common questions I get from sole traders is about allocating a cost to the business for working from home. If you are in a panic trying to get your tax return done before the end of the month, you might forget to include a cost for this in your accounts, but this would result in you paying more tax than necessary – so take 5 minutes and think about what you might be able to claim.
If you are self-employed and work at least partly from home then you are entitled to include part of the running costs of your home in your accounts. But how much is a reasonable amount?
You have 2 options as to how to work out how much you can claim.
1 Flat Rate Method
If your sales are under the VAT threshold (currently £85,000) and you are self-employed then you can use this method. You simply work out how many hours a month you spend on average running your business from home and then include a fixed amount in your accounts, as follows:
25-50 hours: £10 per month
51-100 hours: £18 per month
101 hours or more: £26 per month
The flat rate covers the running costs of your home; you can also claim a proportion of the fixed costs and your phone/broadband as per option 2.
2 Actual Costs
This method requires a little more effort, but it may give you a higher figure and therefore save you more tax. Under this method, you need to apportion the running costs of your home on a “fair and reasonable” basis between those that are personal and those that relate to the business.
This is usually done by reference to the number of rooms you have in your house and the amount of time you use them for business. There is no laid out formula though and therefore how you allocate costs will vary from business to business. Keep any workings you have done so you can back up your figures to HMRC if necessary.
The costs you can actually claim can be spilt into fixed costs, running costs and phone/broadband.
- Mortgage interest (not capital) or rent
- Council tax
- Water rates
- Repairs and maintenance
For example, assume you work from your sitting room 8 hours per day 4 days per week. Your total fixed costs are £6,600 per year and your running costs £1,500. You have 6 rooms in your house. A reasonable allocation of the fixed costs would be £6600 x 1/6 x 4/7 x 8/24 = £210.
An allocation of the running costs could be £1500 x 1/6 x 4/7 x 8/12 (as gas etc not used during the night) = £96
The phone and broadband is claimed on a usage basis only, so if you use your internet 50% business, 50% private you can claim 50% of the cost, including line rental.
If a property repair works solely to the area that you use for business, you can include the full cost in your accounts – for example, your office roof needs repairing. If the repair is to the whole house – then claim in proportion as above.
So claiming costs of working from home is not as simple as it sounds. The flat rate method will give you a quick answer, but the actual costs option may give you a higher figure. If you need any further help then please contact Rosie Forsyth at Wilkins & Co.
Note – these rules only apply to the self-employed and not to owners of limited companies.