By Kathleen Parker, Wellers Accountants
The claiming of work expenses is a legitimate way to reduce your tax bill. However, few people working at home take full advantage of the benefits as it can be such a grey and complex area.
Here’s the low down on how to squeeze the maximum tax savings from your home working and, more importantly, how you can apportion between business and private home expenses.
In short, to claim as a taxable expense, an outgoing:
1. Must be wholly and exclusively for the purpose of the work
2. Must be incurred specifically in the performance of the work’s duties
HMRC mainly try to differentiate between an expense that might be used for both work and personal purposes and those which are necessary for work. For example, the purchase of a work suit would not be allowable as this might be used outside of the workplace and so have a dual purpose. However, the costs of safety clothing or items that were part of a recognised uniform would be acceptable as tax deductible expenses.
If you use part of your home for business, you can deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation. However, you can only deduct a figure that relates to business usage, which must be clearly separated from private usage. Home expenses broadly fall into two categories: fixed costs and running costs.
- Fixed costs relate to the whole house and have to be paid even if there is no business use. These include costs such as, Council Tax, mortgage interest, insurance, general repairs and rent. If part of the home is set aside solely for business use for a specific period then a part of these costs is allowable, these will need to be apportioned by area and time (see below).
- Running costs relate to expenses where the bill may vary with the amount of business use. They include telephone line rental, broadband, cleaning, heat and light. HMRC officers are now instructed to “accept a claim based on any reasonable basis” provided that apportionment is based on usage.
Ideally, HMRC would ask you to separate private home expenses from your business ones exactly e.g. measuring out your electricity usage by the watt and apportioning it accordingly. However, this is entirely impractical and so they provide the following guidelines:
- Area: what proportion in terms of area of the home is used for business purposes?
- Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
- Time: how long is it used for business purposes, as compared to any other use? For example, if a room is used for business four hours per day, you can claim 33% of the utility cost relating to that room because it is effectively used for business 33% of the day.
Another common expense is the cost incurred in travelling to and from a workplace. While an employee may not claim the cost of travel to their permanent place of work, or between two permanent workplaces, they are entitled to claim the cost of any travel to a temporary workplace (less than 24 months), such as other sites or a client's premises.
Hopefully these guidelines help a little but always check with your accountant if you’re not sure.
And don’t forget ladies...HMRC allow a flat rate claim of £3 per week for incidental home expenses! Don’t spend it all at once!