Tax issues for a home-based limited company
There’s a lot of good reasons to run your limited company from home. Number one being - it can be cheaper! After all, if your company is just starting out, why take on the expense of a dedicated office and get locked into paying extra rent, heating and electricity?
That’s not the only consideration. When your business is a limited company, it has its own legal identity and you are an employee. This makes the situation different to that of sole traders and affects the various tax reliefs that are available.
Here’s what you need to know about your home and business costs, and what you can claim if you work from home for your own limited company.
If your company owns any equipment that you use for work, it can claim tax relief on the cost of that equipment in the form of capital allowances.
You can either buy the equipment using the company’s bank account or credit card and record it as a business expense, or pay for it with your own money and claim the cost back as an out-of-pocket expense. If you use your company’s equipment for business and the private use is ‘insignificant’, then it won’t count as a taxable benefit.
However, if you use the equipment for private purposes more frequently than this, it will count as a taxable benefit and the company must report it on a P11D form and pay Class 1A National Insurance (NI).
Phone and internet
You may claim one mobile phone or SIM card used for your business without needing to report this to HMRC. This phone can also be used for personal use without incurring tax. However, only one phone is exempt and any additional phones count as taxable benefits and you must include them in your P11D form and pay Class 1A NI contributions on their value.
If your home phone line is in the company’s name (the contract is between the phone line provider and your company) and is used mainly for business calls, it will not count as a taxable benefit.
If you already paid for a broadband connection before you started to work from home for your limited company, your company can’t reimburse you for home broadband without attracting an extra tax charge. However, if you previously didn’t have broadband at home, need this connection to work from home, and mainly use the connection for your business, it may not count as a taxable benefit. If in doubt, you should discuss this with an accountant.
Running your home
When you’re working from home, your home is also your office, right? While businesses can get tax relief on office rental costs, your home doesn’t belong to the company - it belongs to you or your landlord. And that can cause some complications when calculating business expenses.
HMRC says that, as an employee of any business (including your own company), you can't claim part of any ‘fixed costs’ that you would have to pay whether or not you worked at home. This would include rent, council tax and mortgage interest. If you do claim these back from the company, that will almost certainly be a taxable benefit.
The only costs you can usually claim back from your company if you’re working at home are the additional costs you incur because you’re working there, such as extra electricity and heating bills. You can usually only claim these if you are working at home because you have to, for example, if your company doesn’t have an office elsewhere. If working out how much you can claim seems too complicated, there is another way. HMRC won’t ask how you worked out how much the company repaid you for home working costs, or turn that into a taxable benefit, if it amounts to no more than £6 per week or £26 per month.
There are some exceptions to claiming additional costs - if the work you do at home doesn’t earn money for the company, you almost certainly won’t be able to claim anything back for home working costs without paying extra tax and NI. For example, a company director who does all their chargeable work outside the home and uses their home for company admin would not usually be able to claim running costs from HMRC.
Keep track of your expenses
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Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.