Tax savings and working from home
Oct 05 2010
Homeworking has certain tax benefits
Working from home can be very tax efficient for small businesses, says Paul Webb, tax partner at RJP.
Small business owners are increasingly working from home. For many, the cost of ‘proper’ offices cannot be justified in the current climate and advances in technology make it very straightforward to operate a virtual business. Ultimately, most small business owners tend to travel to clients’ premises for meetings anyway, making the traditional notion of having an office redundant.
Claiming tax deductable expenses for working at home was always a grey area until HMRC introduced the concept of ‘fixed costs’ as part of its attempt to clarify the law for the self employed who worked from home. Fixed costs cover mortgage interest, council tax or insurance premiums on the property and a certain percentage of this expenditure can be offset against the income of the business provided certain conditions are met.
In addition to this, other costs for consumables (like light, heat or power) can also be offset proportionally against turnover as tax deductable expenses. This practice of claiming expenses in this way is only relevant for the self employed, sole traders and partnerships.
But what about those running a limited company?
It is also possible for such business owners to use their homes to provide a tax efficient office space by ‘renting’ themselves a room. In this case, they re-charge the costs of renting the office space rather than simply claiming back what HMRC classify as fixed cost by effectively charging their company rent for the use of their home.
If you would like to operate in this way, it is best done by way of a rental agreement between yourself as an individual and the company, which grants the company non-exclusive use of the required number of rooms in the house. The non-exclusivity enables the individual and his family to continue to use those rooms for private purposes and also, of course, ensures that there are no capital gains tax issues when the property is sold.
The strategy is tax efficient because the company is able to claim a corporation tax deduction for rent paid provided those rents are paid on a commercial basis and are at normal market rates – usually ascertained by researching local serviced office rates.
From a tax perspective, the individual must pay income tax on the rental income received but is able to deduct expenses such as the proportionate amounts of mortgage interest, insurance, rates, gas, electricity etc. This strategy is particularly beneficial for business owners who also have buy-to-let property investments, as losses on the buy-to-let properties can be offset against this rental income.
Paul Webb is a tax partner at Robert James Partnership the Surrey based small business tax and accountancy specialists. To find out more about tax planning strategies visit www.rjp.co.uk or contact email Paul Webb directly
Example of How to Save Tax by Working from Home
The following example explains how this legislation works in practice to reduce the corporation tax payable by eligible small business owners:
Susan is a marketing consultant and has a room at home that is used as dedicated office space during business hours.
To rent an office of equivalent footage locally would cost her in the region of £6,000 each year. Rather than do this, Susan’s company pays a monthly inclusive rental charge of £500 to cover the cost of renting her business premises.
Susan also has a buy-to-let property portfolio that makes a loss of £5,500 each year.
After completing her accounts, Susan has made a small rental profit of £5,000 through renting herself business premises that can be entirely offset against her property investments, thus reducing her corporation tax liability.
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