A lot of self-employed people work from home. Some of the costs of the home can be claimed against tax and, in some cases, these costs may be considerable. Here we consider some of the tax implications of homeworking arrangements for the self-employed.
Your status is important
The tax rules differ considerably depending on whether you are self-employed, as a sole trader or partner, or whether you are an employee, even if that is as an employee of your own company.
Wholly and exclusively
The self-employed pay tax on the profits that the business makes or their share of those profits. This means you need to ensure that costs incurred can be set against that profit. For day to day overheads, those costs generally have to be incurred ‘wholly and exclusively’ for the purposes of the trade to be tax-deductible. It is essential to keep good records of the costs you incur.
Use of the home
If the self-employed carry on some of their business from home, then some tax relief may be available. HMRC accepts that even if the business is carried on elsewhere, a deduction for part of the household expenses is still acceptable provided that there are times when part of the home is used solely for business purposes. For example, if there is only minor use, for example writing up the business records at home, then a reasonable estimate without detailed enquiry can be used.
When relating to costs for the use of the home, wholly and exclusively means that when part of the home is being used for the business, then that is the sole use for that part at that time.
HMRC seems to accept that an estimate of a few pounds a week for home use is acceptable. If more is to be claimed, then HMRC suggests that the following factors are considered:
- the proportion in terms of area of the home that is used for business purposes
- how much is consumed where there is a metered or measurable supply such as electricity, gas or water and
- how long it is used for business purposes.
The costs that can be claimed
HMRC will accept a reasonable proportion of costs such as council tax, mortgage interest, insurance, water rates, general repairs and rent, as well as cleaning, heat and light and metered water.
Other allowable costs may include the cost of business calls on the home telephone and a proportion of the line rental, in addition to expenditure on internet connections to the extent that the connection is used for business purposes.
How it works
If there is a small amount of work done at home, a nominal weekly figure is usually fine, but for substantial claims, calculations may be required.
For self-employed businesses, the depreciation of assets is covered by a set of tax reliefs known as capital allowances. For equipment at home, such as a laptop, desk, chair, etc., capital allowances may be available on the business proportion (based on estimated business usage) of those assets. If say a laptop is solely for business usage, then the whole cost will be within the capital allowances rules.
The cost of travelling from home to the place of business or operations is generally disallowed, as it represents the personal choice of where to live. The fact that the individual may sometimes work at home is irrelevant.
Where an individual conducts office work for their trade does not by itself determine their place of business, so although many may be able to claim tax relief for the costs of working from home, far fewer will be able to claim travel costs of going to and from their home office.
This principle assumes that there is a business or operational ‘base’ elsewhere from which the trade is run. Typically, the cost of travel between the business base and other places where work is carried on will be an allowable expense, while the cost of travel between the taxpayer’s home and the business base will not be allowable.
However, where there are no separate business premises away from the home, travel costs to visit clients should be fully allowable. What really needs to be decided is where the business is really run from.
Capital Gains Tax
Capital gains tax contains a tax exemption for the sale of an individual’s private home, known as principal private residence relief (PPR). Where part of the dwelling is used exclusively for business purposes, PPR relief will not apply to the business proportion of the gain. For example, for areas of the home and garden where you have a designated room such as an office or garage used exclusively for the business. However, HMRC makes clear in their guidance that ‘occasional and very minor’ business use is ignored.
The main thing is to keep good records and be sensible about how much to claim.
Last updated: 17.11.2020
Whilst the information in this document is correct; you should always obtain individual advice from a qualified accountant.