Tax issues for a home-based limited company

It’s not just sole traders who are running businesses from home.

Lots and lots of limited companies don’t have an office outside the home. After all, if you don’t need an office, why take one on and have to pay rent, electricity, and so forth.

Are there any tax reliefs available when you work from home for your own limited company?

Yes there are, and the situation is different from sole trades, because when your business is a limited company, it has its own legal identity. The company is the business and your employer, you are an employee (whether or not you’re a director).

Here’s what you need to consider:

• The equipment you use to work at home, such as your computer, desk and chair. Who owns it - you or the company - and how much non-business use, if any, does it get?
• The costs of running the company from home, such as your broadband and telephone line. Are they in your name or the company’s? Who pays for them? How much do you use them for company business and how much, if at all, do you use them privately?
• The costs of running the home, such as your mortgage or rent, electricity, gas and water bills, and council tax. Can the company cover any of that for you?

Let’s look at each of these in turn.

Equipment

It’s usually a good idea for the company to own any equipment you use for work, because then it can claim tax relief on the cost of that equipment in the form of capital allowances.

So if you’re a web designer with your own limited company, and you buy a new Mac to use for design, pay for that Mac using a company credit card.

Or, if you don’t have a company credit card, pay for it with a personal credit card and then claim it back as an expense. That way the computer will belong to the company.

What if I already owned the computer when I set up the company?

Here’s how to deal with it in that case.

Business and non-business use

If you use your company’s equipment all, or nearly all, for business, then there’s no issue with taxable benefits. HM Revenue’s expression is if the private use is “insignificant”.

If you use the equipment privately more than this, so for example you regularly let your 5-year-old nephew play games on your company iPad, then there’s a taxable benefit issue and the company must report it on form P11D and pay class 1A National Insurance.

Costs such as phone bills

Again, ideally the phone line should be in the company’s name (i.e. the contract will be between the phone line provider, e.g. BT, Carphone Warehouse, and your company) and should be used for business calls only, or just a few private calls.

Otherwise you’ll run into all kinds of issues with taxable benefits.

So have a separate business phone line installed for the company, or alternatively use a provider such as Skype.

This applies to mobile phones as well as landline phones.

Be warned though, that a BlackBerry, iPhone, or similar doesn’t count as a mobile phone when we’re looking at taxable benefits.

It’s a computer!

So if your company buys you an iPhone 4, don’t use it for personal calls or playing games if you can help it - buy yourself another iPhone 4 for that!

What happens if I have only one broadband line installed and use that for both business and private use?

The best way to avoid taxable benefit implications is to have the broadband line in the company’s name, then you pay the company back for any private calls.

It’s a flat rate - I pay the same for broadband no matter how much I use.

My own opinion in that case is that you shouldn’t have to pay anything back because you don’t pay extra for private use. But that’s a personal opinion only. Be prepared to argue this with HM Revenue if they come knocking.

Home running costs

When you’re working from home, you’ll be incurring extra costs, such as electricity, gas and water - because you’ll have to keep the lights on, heat the house, and make yourself cups of coffee - during the working day.

But the building isn’t the company’s.

It’s yours (or your landlord’s, if it’s a rented property).

So can you claim relief on these costs like a sole trader can?

What many accountants advise their clients to do is to work out how much relief you could claim if you were a sole trader - then charge your company rent for that equivalent amount.

Have a proper legal rent agreement in place between you and your company.

The company can then put the rent as a cost in its accounts and claim corporation tax relief on it.

The rent does count as income from property received by you, so you’ll need to put that on the property pages of your tax return.

BUT you can then set off the costs of running that part of the property against the rental income, and guess what, the two figures will be exactly the same.

So there’s no additional cost to you except for the time spent putting two more figures onto your tax return.

Just be careful though if you have any other property income. Here’s a tip from one of our affiliates on how to deal with that.

And make sure your mortgage, or tenancy agreement, allows you to effectively sub-let part of your home in this way.

What about the legal issues from Companies House?

More on that soon!

Disclaimer: This article is written on a general basis and is no substitute for specific advice from your own accountant about your own business situation.