Tax benefits for sole traders working from home
Working from home is becoming more and more popular. After all, when you're just starting up in business, why take on the cost of having an office? And working from home makes it much easier to fit running your business around family commitments.
But are there any tax reliefs available when you work all, or part of your time, at home? After all, you're being kind to the environment by not commuting, and if your business was office-based then you'd be able to claim the costs of that office as part of your business expenses.
The answer is yes, reliefs are available!
But what are they and how do you claim them?
How much do you work at home?
Different home-based business owners spend different amounts of their time working from home.
If you're a piano teacher, you may spend some time teaching your pupils at your home, but you might also spend time giving piano lessons in a school, or playing the piano for ballet classes at the local dance academy.
But if you're a jobbing gardener, the only business activity you’re likely to do at home is to write up your business books.
How much of your home do you use for your business?
Yet again, every home-based business will be different.
If you're a writer, you'll probably have one room designated as your study and you'll mostly work there. But on a fine day you might want to take your work out into the garden and tap away on your laptop in the sun (just watch out for low-flying pigeons).
A home-based accountant might work in a study but meet and greet clients in their living-room.
It depends on you, your home and your business!
The good news is that HMRC accept that every sole trader who works at home some or all of the time, will have a different set-up.
So, when you work at home, you’re allowed to take a proportion of all your home running costs and put those into your expenses, so that they reduce your profit and you pay less tax.
How is the proportion worked out?
HMRC know that when you're home-based, you won’t get different bills for your business and private running costs. The Electricity Board won't send you two bills, one for your business electricity and the other for your private electricity. So HMRC are happy for you to work out a proportion of your total running costs.
HMRC suggest you work out what proportion to use depending on how much of your home you use for business at all, and how much you're using that part of your home for business use as opposed to private use.
I live in a house with 10 rooms.
Of those rooms, I work sometimes in my office and sometimes in my living room, on my computer. The office is also used for hobby use as a music-room, and I estimate that I use it for business 85% of the time. The living-room is only rarely used for business, I'd estimate 10%.
(HMRC are happy to accept a reasonable estimate of business use. They don’t expect you to sit with a ticking time-clock totting up how much time you spend working in each room.)
I receive an electricity bill for £123.69. How do I work out the business element of that?
Divide into number of rooms: 123.69 / 10 = £12.37 for each room
Office use: £12.37 x 85% = £10.51
Living-room use: £12.37 x 10% = £1.24
Both rooms: £10.51 + £1.24 = £11.79
So I would put £11.79 into my accounts under "Use of Home".
That's a sample calculation based on the number of rooms in a house and the amount of use each room gets.
You might alternatively choose to work out the proportion based on floor area of each room. If you’re a home-based photographer with a large studio-cum-darkroom, and you use a lot of electricity in that room, then you could use floor area to work out the split between business and private use, if you think that'll be fairer.
Just be prepared to justify how you&'ve worked out the proportion if HMRC come calling.
What costs can I claim a percentage of?
Use the proportion to work out a percentage of your:
- Council tax
- Home insurance, unless your business is covered by a separate policy
- Mortgage interest (not repayments of the capital, you can't claim any of that)
- Rent, if you rent your home from a landlord (as a sole trader you can’t claim to rent a room from yourself)
- General household repairs and maintenance, for example repairs to the roof (but you can't claim for redecoration to a room that has no business use)
- Water rates, unless your business use of home is "minor" - e.g. you’re a jobbing gardener writing up your books at home. Because HMRC don't think you'd use extra water for that, they won't let you claim any.
Other costs you could include are:
- Business telephone calls
- A proportion of your landline rental, based on the ratio of business to private calls that you make (assuming you're using one landline for both business and private calls)
- A proportion of your broadband, based on the ratio of business to private Internet use
HMRC give information and examples about these costs on their website. These links are to manuals written for tax staff, so if you need anything translating from the jargon, please ask!
Are there any shortcuts?
Yes! If you are a sole trader, or in a partnership where none of the partners are limited companies, you can claim a flat rate allowance per month for your light, heat and power. You'll still need to do the calculations for any other costs you want to claim.
The flat rate allowance is set by HMRC and depends how many hours you work from home each month:
- 25-50 hours: £10 per month
- 51-100 hours: £18 per month
- 101 hours or more: £26 per month
Are there any pitfalls to be aware of?
Yes. Above I mentioned that I don't use either my office or my living-room 100% for business. That's very important.
Normally you don't pay Capital Gains Tax when you sell your main home. It's exempt.
But if you use any part of your home just for business, then the exemption covering the main home will not apply to that part of your home - and you could have to pay Capital Gains Tax.
If, instead of using my office as a music-room as well, I just used it for business, then if and when my husband and I come to sell our home, I would at the very least have to do a Capital Gains Tax calculation to see if I had any tax to pay on that room.
So if you run your business from home, try not to use any room just for business - and try and be able to prove that if you can.
For example, if HMRC came knocking at my front door, I could justify that the office is a music-room too by showing them my piano set up in there.
Disclaimer: The content included in this guide 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 guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.