Can I make a claim for my home as an office?

Home Office

A client asked me this very question recently. The simple answer is, of course. However, as a director of her own company, there is a little more to consider.
Essentially, there are three options available.
The fixed rate allowance and actual expenses method available for the self-employed still apply but are operated differently, while the third option of charging the company a rent, can also be considered.

Claim fixed rate allowance

HMRC will allow a flat rate of £18 per month without the need to maintain receipts or bills.  An expense claim is made to the company, much like you would if you made any other claim as an employee.
The benefit of this method is that it is obviously very simple to operate, and this allowance will not be required to be disclosed on your self-assessment return. But as is often the case, may not reflect the true costs incurred by those working from home on a regular or permanent basis.

Claim actual expenses

As touched upon above, the rules for directors and employees of limited companies differ from those of the self-employed, in that only the incremental cost of working from home can be claimed.
This means any costs that would have been incurred anyway, such as the fixed costs of insurance, rent and council tax, are immediately ignored, as are the fixed charge elements of gas, electricity and metered water.
The variable costs must then be reasonably apportioned between personal and business use.  Typically, apportionment would take into account time spent working from home, and the area of the overall floor space used.
This method will normally only give a more favourable result when compared to the fixed flat rate allowance, if significant time is spent working from home. Preparing the expense claim, which also does not need to be included on your self-assessment return, will be a little more complex to calculate.

Charge a rent

Instead of making an expenses claim, as in the previous two methods, you could charge the company a rent.  However there is a lot more to consider before choosing this options, such as:

  • You’ll need to put a license in place that permits the company to use your home for business purposes
  • If you rent your home then your landlord may not permit sub-letting, so this is something you will need to check
  • The rent charged must be at a market rate. See below
  • The room must not be used exclusively for business purposes
  • The rental income must be declared to HMRC via your self-assessment tax return
  • If you co-own your home, then the rental income and income tax liability is split accordingly

The area that HMRC would be most interested in is how the rent charge has been determined.  If you have overvalued the rent charge then HMRC will not allow full tax relief in the company’s corporation tax computation.  You would still need to pay income tax based on the full rent received, so it’s important to ensure the rent charge isn’t excessive.

Calculating market rent

There is no set method for determining an arm’s length rent charge, but some strategies could include:

  • Arranging for an estate agent to estimate the rent
  • Finding out how much it would cost to rent a similar sized office space in a business hub etc
  • Calculate the business proportion of household costs and add a mark up. This time you can include fixed costs such as insurance, mortgage interest, rent.

The self-assessment tax return of the home owner(s)

Paying a market rent works particularly well if implemented correctly. The company will obtain tax relief, on the rent it is charged while you need only pay income tax on your rental profit.  This means the business proportion of the costs calculated in the previous section can be used to reduce the amount of rent received that is subject to tax for you personally.
As mentioned, if the home is jointly owned then the profit on the rent is split between the owners, and declared to HMRC accordingly.
If you require any advice, whether you are just looking to start up or are a current business owner, please contact Roy at Raffingers.
Roy Butcher is a Partner, and Corporate Finance advisor at Raffingers.

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