There is often a misconception of what directors can claim through their company due to working from home. The main reason for this is that they confuse what they can claim with what a sole trader or partner could claim in the same situation.
Directors (and employees) are subject to different rules and the rules are a lot stricter, due to being taxed under employment income legislation.
Claim correctly from the outset
When it comes to home expenses, HM Revenue & Customs (HMRC) leaves the taxpayer to ‘self-assess’, with the expectation that claims are made in line with their detailed guidelines.
Just because you have been claiming the same amount for years from your company, does not necessarily mean it is the correct amount. Should HMRC open an enquiry and find inaccuracies in your claims, they can go back many years in terms of calculating tax, national insurance, interest and penalties due.
Working from home under homeworking arrangements
Before you can make a claim through your company, you need to first determine if you are working from work under “homeworking arrangements”. HMRC’s definition of this can be found here.
How and what can you claim?
If you meet the definition of “homeworking arrangements”, there are three different methods for claiming home expenses from your company, each permitting different types and amounts of allowable costs.
- Flat rate
The flat rate allows you to claim an expense from your company of £6 a week, as opposed to the exact amount you have actually spent.
Benefits of this method include its simplicity and lack of records required.
The flat rate payment is tax-free for you, and the company receives Corporation Tax relief on the expense.
- Claiming the additional costs you incur
Alternatively, you can claim from your company the additional cost of working from home. This would be a calculation of the additional expenses that you incur purely because you are working from home, such as the additional heating and electric.
Any costs that you would incur even if you were not working from home, such as mortgage interest or council tax, cannot be claimed without tax consequences on you and your company.
The main costs used in this calculation would be the extra cost incurred when working from home of:
- Lighting;
- Heating;
- Metered cost of increased water use;
- Business phone calls (ie, the additional call costs you incur); and
- Dedicated broadband service.
You cannot claim for costs that would be the same regardless of where you are working, such as any proportion of :
- Rent;
- Mortgage interest;
- Council tax; and
- Water rates.
The monies paid to you to cover the additional costs incurred when working from home, will be received by you tax-free. Your company will receive Corporation Tax relief on the expense.
- Renting a room to your company
This option involves renting a room/rooms in your home to the company, usually under a licence agreement for non-exclusive use of an office in your home. The rent cannot be more than the market value.
The rent would then go through the company’s accounts as an expense, thereby receiving Corporation Tax relief.
The rental income would go on the personal tax return of the person/(s) owning the home.
Against the rent, a proportion of some expenses could be claimed, for example :
- Heating costs;
- Electric;
- Water;
- Mortgage interest (not capital) or rent paid;
- Council tax.
Therefore, you (and any fellow owners of the property) would be subject to income tax on any rental profit (rental income less allowable expense) through your personal tax returns.
A key consideration here is that exclusive business use of any room may result in a Capital Gains Tax (CGT) liability when your home is sold and you need to also consider business rates. Therefore, do get professional advice before claiming this option or before using any room/space in your home exclusively for business.
How M+A Partners can help
Claiming home expenses through a limited company is a complex area and the right approach is always determined by your unique set of circumstances. Our tax specialists work closely with you to identify the most suitable and tax-efficient method for claiming home expenses through your company.
Should you have any queries on this matter and would like to discuss how we can help you and your company, do get in touch with me using the details below.
