Working From Home? How To Reduce The Company Tax Burden
Increasingly many people are running their own small businesses from home but this results in increased household expenses for heating, electricity, phone bills etc.; expenses that would not be incurred by those who go to an external workplace. But when working from home there are opportunities to reduce the tax burden of the company or self-employed individual by considering charging rent for the use of part of the home for business. How this is done depends on whether the business is set up as a Limited Liability Company or on a self-employed basis.
A self-employed individual is simply allowed to deduct certain costs against the income received if they are wholly for the purpose of running the business. Of course for those working from home, in practise this is not so straightforward as there are some expenses that are part of a larger expense incurred that was not for running the business such as an electricity bill or any other utility cost. The issue then becomes what proportion of the non-exclusive costs can be attributed to the business?
For a limited company it is slightly different because the company and the director are two separate entities yet some expenses are incurred personally by a director working from his or her own home in a way that they would not be if the business was carried out from premises in the company’s name. But again the real issue is how much of the non-exclusive costs can be attributed to the business?
It is worth noting that some expenses related to working from home cannot be reimbursed such as a proportion of the mortgage or rent for the property, or the council tax. Neither can any improvements needed in order to be able to work from home such as building works or buying office furniture.
But just how does a director working from home charge his or her own company rent and not incur additional income tax?
One option is to take advantage of the arrangement put in place by HMRC to help employers determine what is a reasonable amount to reimburse employees for the extra expenses they incur by working from home. £4 per week or £18 per month can currently be claimed by an employee without the need to keep any records to show the additional expenditure. HMRC have set the £4 per week guideline figure to cover heating and lighting the room in which business activities are carried out.
A company (employer) can pay the director (employee) more than the £4 per week amount but in such cases evidence must be kept to prove the costs that were incurred. This can simply be a straightforward reimbursement of costs backed up by evidence or it can be a pre-agreed rate that increases in line with inflation.
In either case there should be a formal agreement between the company and the director and the room(s) used for the business should still be available for personal use outside working hours in order to avoid any capital gains tax implications when the property is sold. A room that is not used exclusively for business also addresses any potential issue with separate rates being charged for business use.