Considering home expenses for your tax return
Are you, like an estimated two million people across the UK, still preparing your tax return to file by the 31st January 2012 deadline?
HMRC has announced, due to pre-planned strike action, that a two day extension has been granted for late return submissions - meaning that anyone who submits their return and pays their tax up to 2nd February will not receive an automatic fine. But despite this respite, it’s still important to get your tax return submitted as soon as possible.
If you’re a business owner or freelancer who carries out work from your own home, you are entitled to include part of the running costs of your home in your accounts, which will save you some tax.
So if you’re still unsure about what you can and can’t claim for your home expenses, here are some tips to consider when completing your tax return:
Apportioning the costs
How much of the running costs of your home you can claim, depends on the type of business you have and what you actually do at home.
For example, if you’re a jobbing gardener you might spend an hour or two a week writing up your books at home, but spend the rest of your working life at your customers’ premises.
But if you’re a web designer, you may well do 90% of your work at home and only occasionally visit clients.
HMRC say that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost - the part that relates to your actually living there - and the business element.
One method that’s often used is to work out how many rooms you have in your home, and how many of those rooms you use for business - and how much you actually use that room for business.
It’s not a good idea to use any part of your home solely for business activities all the time and never use it for any private activities, because capital gains tax will then be due on the part you use just for business if and when you sell your home.
For example, my own office at home is also my music room, and I could easily prove that to a visiting HMRC inspector because there’s a piano in there.
But the room must be used for business only for part of the time.
There are 10 rooms in my home. I only use one for business, and 90% of the use of that room is for business. So I would add up all the costs I can claim, and multiply that by 1/10 and then by 90%, to get my accounts figure for business use of home.
But what running costs of the home can I actually include in my accounts?
Costs you can claim
Here are some of the costs you might incur to run a home, which you may then be able to claim part of in your business accounts:
You can’t charge your business rent when you’re self-employed, because legally you are the business. But if you are renting your home from a landlord, then you can claim a proportion of the rent for your business.
If you’re buying your home through a mortgage, you can claim a proportion of the interest only, not the capital repayment.
You can claim a proportion of your council tax cost.
However, depending on how much you use your home for business, you might have to pay business rates rather than council tax.
Repairs to the property
If the repair relates solely to the part of the property that’s used for business, you would include this cost in your accounts in full, subject to the business use of that room.
So for example, if the ceiling in my office-cum-music-room was repaired and that cost £200, I wouldn’t need to divide that by 10 because the repair was only for that room – I would just multiply by 90%, and include £180 in my accounts.
If the repair is to the whole house, for example a repair to the roof, you can include that in the same proportion as you would the rent or council tax – so in my case, the repair cost x 1/10 x 90%.
But if the repair is just for a part of the house that’s not used for business, such as replastering of a bedroom, then you couldn’t claim any part of that repair in your business accounts.
Telephone and broadband
Remember that what you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.
You can claim the full cost of all your business use of the line, and a percentage of the line rental, based on how much you use the line for business purposes and how much is for personal use.
If your home water supply is used a lot for business, for example if you run a car valeting service, then you would need to apply to the water company for this to be separately charged, and you could claim the full cost.
But if your business use of water is only minor, you can’t claim any of the cost for your business.
Claiming costs of working at home is not as simple as it initially sounds. If you’re in any doubt as to what you can claim, you should seek further advice from an accountant.
- Finance Bill 2017-19: Making Tax Digital back on the agenda
- A little goes a long way: pension prep for freelancers
- 4 ways to keep your business ticking over while you travel
- Business on the beach: five holiday reads for freelancers
- Self Assessment: what you need to know about payments on account