Tax issues for a home-based limited company

 

It’s not just sole traders who are running businesses from home. Plenty of limited companies don’t have dedicated premises either. After all, if you don’t need an office, why take one on and have to pay rent, electricity, and so on?

There are various tax reliefs available when you work from home for your own limited company. The situation is different to that of sole traders, because when your business is a limited company, it has its own legal identity. The company is the business and your employer, while 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

If the company owns any equipment 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 all, or nearly all, for business and the private use is “insignificant”, then it won’t count as a taxable benefit

However, if you use the equipment privately more frequently than this, it will count as a taxable benefit and the company must report it on form P11D and pay Class 1A National Insurance (NI).

Costs such as phone and broadband bills

If the phone line is in the company’s name (i.e. the contract is between the phone line provider and your company) and is used for business calls only, or just a few private calls, it won’t count as a taxable benefit.

This applies to mobile line rental costs as well as landlines, although bear in mind that smartphones themselves count as computers when it comes to taxable benefits.

If you have one broadband line installed and use it for business and private use, there should be no taxable benefit implications if you have the line in the company’s name, and then pay the company back for the cost of any private calls or broadband usage.

And if you pay a flat rate for your phone and/or broadband service no matter how much you use, it’s possible that you won’t have to pay anything back. If in doubt, you should discuss this with an accountant. 

Home running costs

When you’re working from home, you’ll be incurring extra costs, such as electricity, gas and water, during the working day. But the building doesn’t belong to the company - it belongs to you (or your landlord, if it’s a rented property).

So can you claim relief on these costs like a sole trader can? Unfortunately not. The rules are much stricter for employees, including company directors working at home, than for sole traders.

HMRC says that you can't claim part of any "fixed costs" that you would have to pay whether or not you worked at home - which would include rent, council tax and mortgage interest - and if you do claim these back from the company, it'll be a taxable benefit.

HMRC also says that you can't claim without paying extra tax and NI for any home-working costs if the work you do at home isn't work that earns money for the company - for example, if you do your chargeable work on client sites and just do admin at home - or if your employer provides facilities elsewhere and you work at home from choice rather than necessity.

However, you can claim part of any extra costs that you incur working at home, such as light and heating bills, without paying extra tax and NI. Here's how to work that out.

Discover the easy way to keep track of your business’s expenses with a 30-day free trial of FreeAgent’s award-winning accounting software.

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.

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