This applies to both the self-employed and employees. Over the last few years, HMRC has given much publicity to what it sees as ‘acceptable’ claims for working from home. These amounts are quite modest but higher amounts may be claimed if they can be justified.
The rules of what can be claimed by employees are the self-employed are different. The basic difference is that for an employee to be successful in making a claim, they must ‘necessarily’ incur the cost in the performance of their duties. This is quite a difficult test to pass and HMRC enforce it quite rigorously.
A director operating through his or her personal service limited company is classed as an employee of that company and not deemed a self employed person for the purposes of what follows below.
For the self-employed, HMRC sets out a table which reaches a maximum £26 a month for someone who works from home for more than 100 hours each month – but note that this allowance does not cover mortgage interest, rent or council tax.
Employees can, in restricted circumstances, also be reimbursed up to £18 a month tax-free if they have ’homeworking arrangements’ even if they are voluntary. If there is no reimbursement, a stand-alone claim can only be made where arrangements are mandatory.
Certain employments have their homeworking arrangements already agreed by HMRC e.g. university lecturers, councillors and examiners.
Whether a person is employed or self-employed, in order to claim the above mentioned tax deductible expense, that person should be performing ‘substantive duties’ from home and not just spending an hour or so on bookkeeping or making a few calls from home in the evening.
The above focuses on the ‘simplified’ rules that can be used for a quick and easy method of making a claim for use of home as an office.
There is nothing to stop you using a more detailed and more accurate method to claim for expenses incurred.
As a general rule of thumb, employees can only claim the extra costs incurred (assuming they necessarily have to work from home) whereas the self-employed can claim for a fair apportionment of home utility costs.
Checking that home is a workplace for employees
HMRC use a set of tests to determine if the home is a workplace for tax purposes for employees:
the duties that the employee performs at home are ‘substantive duties’ of the employment. Substantive duties are duties that an employee has to carry out which are all or part of the central duties of the employment. Duties which are preparatory to employment (i.e. background reading for a school teacher or journalist) are not regarded as substantive.
the substantive 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.
What can an employee claim for home as office?
The main point to note when claiming as an employee, if it is even possible under the rules, is to only claim the extra costs incurred. Possible costs to claim are:
Extra metered costs of light and heat
Business rates - if charged, not council tax
Internet access - providing not already in place
Insurance - if additional insurance is taken out
Telephone calls (not line rental)
Cleaning - if extra cleaning is required
A homeworking employee cannot reclaim mortgage interest, rent, council tax, standing water charges or line rentals. The reason for this is that the costs are incurred anyway; whether or not the employee works from home. It is only the extra costs that can be claimed. No claims are permitted where there is a dual private use and this therefore rules out expenses such as general repairs and decorating costs. Tax relief will be given on a dedicated business items for instance a business telephone line or internet access.
What can the self-employed claim for home as office?
Unlike employees, the self-employed can claim a proportion of home utility and running costs.
The types of costs that may be considered are a proportionate claim for the following:-
• Light and heat
• Council tax
• Mortgage interest
• Home insurance
• Broadband costs
• Re-decoration and repairs
The self-employed should try to apportion the above costs based on metered use. This is not always possible. They may consider a proportion based on square meter of each room space use, or by number of rooms in the house. They should also factor in the percentage use. A person may use an electric heater during the day to keep a single room warm. This could be in preference to warming the whole house using gas central heating. They should claim for the estimated cost of the electric used. It would be unfair to claim a proportion of the gas central heating as this is not used during the day for business.
If you do not paint the room that you are using, then it is unfair to claim a proportion of the redecoration costs of other rooms in the house and then claim a proportion based the floor area of the converted room compared to the floor area of the whole house.
If annual household gas and electric cost was £2,500 pa and one room was used for business that made up 20% of the total house floor area then £500 of costs could be allocated to the home office space. If the room was used for say 10% of the time for the children to play after work and time for private internet use then the business cost to claim would be reduce to £450 pa.
The above is a simple example. The household heating may only come on in the morning and evening and not therefore be used during normal office hours. The person may only heat the room used for business during the day and similarly only use electricity in their office room. They may use the kitchen to make occasional drinks throughout the day and their only other water use may be to flush the toilet.
There are no fixed rules that the self-employed should adopt. They should use a fair method of apportionment to reflect the cost of services used. This permits the self-employed to claim for services that are already being incurred privately e.g. a broadband connection. This applies if the service is partly used for business. Apportionment of fixed costs, that will be incurred whether or not the person works from home or not, is not available for employees. The latter can only claim for the strict extra costs incurred as a direct result of working from home.
Telecommunication and similar costs - Getting the contract right
This section applies to employees and also the director-shareholder working for their own personal service company from home.
Most people that work from home will have their telephone and broadband contract in their personal name and therefore there will generally be no extra cost of using it for business and therefore nothing can be claimed as a business cost.
They cannot claim for the telephone line rental. They can only claim for the extra metered business telephone calls. If they have a free allowance for calls in their telephone contract and do not exceed that allowance then again there is no extra cost incurred and therefore nothing can be claimed for tax.
If an employee moved to a new house and therefore had no existing broadband contract or the employee’s existing home broadband was slow or poor quality and they decided for business reasons to upgrade to high speed broadband then in both cases they may consider taking out the broadband contact in the name of the business e.g. their personal limited company.
They would then be able to claim all of the fixed monthly broadband costs as a business expense. In the latter case there is no extra cost of using the broadband for private household purposes and therefore no benefit in kind would arise for private use.
If the contract for the broadband is changed into the name of the company then there is an argument for then claiming the whole cost as a business expense. This can however create other issues. H M Revenue & Customs may argue that the employee is just trying to claim a tax deductible expense for what is effectively their household broadband and which is a private cost. A taxable benefit in kind may therefore arise on the whole cost incurred. This would therefore reverse the business tax saving and could also create a National Insurance cost.