Working at home has now become a necessity more than a personal choice. But for self-employed individuals, this is already their “new normal” long before the pandemic started.
For years, Her Majesty’s Revenue and Customs (HMRC) drafted several legislations to soften the blow of tax fees charged to self-employed workers. They made tax-deductible expenses to specific costs incurred in doing business at the premises of your household.
One frequent self-employed tax deduction is when you use your home as an office. In 2012, the HRMC published a fixed rate of £6 per week allowance for individual contractors using their home to do business work.
This option requires no justification process (e.g., showing receipts) and applies to all self-employed workers in the UK.
However, a freelancer may file for a higher claim provided that you have the complete and legal documents to justify a higher allowable expense request to the HMRC. The rate of a home as office claims is usually based on the following criteria.
- The hours of business use you spend at home.
- The size of your “home office” relative to the size of the whole property.
- The kind of equipment you use.
- The number of individual living in the household and;
- Whether or not the room you use functions for domestic purposes or solely for business.
From the fiscal year 2013-2014 onwards, the HRMC declared a simplified flat-rate deduction based on the hours you spend doing business work at your home. Below is the list of hours and the equivalent rate that you get to claim from the HMRC.
- 25 to 50 hours equates to a flat rate of £10 per month.
- 51 to 100 hours equal to a flat rate of £18 per month.
- One hundred one and more hours equates to a flat rate of £26 per month.
For those working for less than 25 hours, the general rate of £6 per week applies.
For declarations based on whether or not the “business” premises also double as a private accommodation to the owner, the adjustments are as follows (Applicable for residential homes, pubs, or hotels).
- For a single occupant – £350 per month
- For two occupants – £500 per month
- For three or more – £650 per month
The flat rate shoulders common household goods and services such as food and utility. But property or room rent, mortgage interest, and council taxes are excluded from the amount.
Other Allowable Expenses to Claim for Working at Home
- Office, property, and equipment costs
- What you can claim
You can file for allowable expenses for items you usually use for less than two years, such as the following.
- Business use of phone, fax, mobile, internet bills, stationery, and postage.
- For pieces of equipment (e.g., computer, printer, and computer software), claim allowable expenses if you use a cash basis as your accounting system. For traditional accounting, claim for capital allowances.
- Computer software used for more than two years provided that you make payments for its renewal.
You can also claim expenses for:
- Rental payment for company premises
- Utility bills
- Water rate
- Property insurance and security
- Other home items used partly for office purposes
- What you cannot claim
You cannot claim for allowable expenses for purchasing company premises.
- Travel costs
You may file for allowances on expenses incurred for company purposes such as:
- Fuel, parking, repairs, and servicing
- Vehicle insurance and license fees
- Hire charges
- Train, air, bus, and taxi fare
- Meals on overnight organization trips
However, you cannot declare for allowances on personal driving and travel costs, fines incurred, and the travel between home and work.
Claim allowance on purchased vehicles to be used for company purposes. You can calculate it depending on the type of accounting method you use or through the HMRC’s reduced expenses rate.
This rate determines the amount of your allowance based on the mileage traveled by the vehicle instead of its actual purchase or running cost.
- Vehicles driven for the first 10,000 business miles over a year equates to a flat rate per mile of 45p.
- Vehicles driven after 10,000 business miles equates to a rate per mile of 25p.
- For motorcycles, it is 24p
If you have already claimed capital allowances or included the vehicle purchase as an expense in your business profits, then you are not allowed to declare for simplified payment.
- Legal and financial costs
Self-employed working at their homes may file for allowable business expenses on the following.
- Architects, accountants, and legal professional fees
- Professional liability insurance
- Bank, credit charges, and overdraft
- Leasing payments
- Interest on business credit loans
- Other finance payments
- Business insurance policies (public liability insurance)
- Goods and services included in your turnover but not paid by clients.
However, you cannot claim for allowances in the following situations:
- Charges and fines for violation of the law
- Legal expenditures incurred in buying properties or machinery
- Repayments of loans and other financial arrangements
- Debts excluded in the turnover report
- Debts incurred for fixed asset disposal
- Staff expenses
An individual using their household as an office may also file and claim for allowable business expenses for employee wages. This includes their benefits, pensions, insurance, agency fees, employer’s National Insurance, and training classes attended for work purposes.
However, what you cannot claim are costs incurred for hiring domestic services or caregivers such as nannies.
How to Make Claims?
To avoid any problems, keep an accurate record of all your business-related transactions as proof of your costs.
Calculate all your allowable expenses for the fiscal year and input it onto your Self-Assessment Tax return. You do not need to send proof of transactions when you file and submit your tax return. However, having a copy of everything makes the process easier if HMRC decides to question you.
The HMRC has set complicated tax rules for individuals working from home. Regulations for claiming to vary whether you are self-employed or under a limited company. It is best to seek the help of a professional accountant when it comes to the taxation and financial aspect of your business. Annette & Co. is just right around the corner ready to help!