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How To Set Up A Home Office For Tax Purposes

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As the coronavirus outbreak has grown and lock down began, more and more business owners found themselves working from home. For some business owners this was a case of working from the kitchen table, while others took on a spare room as their new office. As the lock down begins to relax, business owners are left wondering if setting up a home office could be a more permanent solution for them.

In this blog post we would like to share how you can set up a home office for tax purposes. We will look at this from three different points of view. This includes the point of view of the business owner of a limited company as well as the view of an employee and the view of a sole trader.

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Business Owner of a Limited Company

As the business owner of a limited company you are able to claim the cost of working from home through your limited company. In 2019 to 2020 tax year, this is a flat rate of £4 per week. This then rises to a flat rate of £6 a week for the tax year 2020 to 2021. The cost of working from home, in this case, is classed as an expense in your limited company accounts. This means you will get corporation tax relief in this instance. It is important to note that this is not seen as a benefit in kind. Therefore you do not need to report it on the directors’ self-assessment tax return.

It is possible to rent part of your house to your limited company, as a way to set up a home office for tax purposes. To do this, you will need to have a proper rental agreement between your home and your business. The rent would then be classed as an expense in the limited company accounts. You will therefore get corporation tax relief for this. The income from this received personally would need to be recorded in the directors’ self-assessment tax return.

Allowable expenses would be able to be claimed against the rental income. This covers things like a proportion of rent, council tax, utilities and similar household bills. The downside of this is that there could a Capital Gains Tax implication when you come to sell your home. This is due to part of your house being used for business. It would mean you would therefore not qualify for private tax residence tax relief.

If you are a business owner of a limited company and considering setting up a home office for tax purposes, contact our team. We can talk through the options with you to ensure you are aware of what to expect and you make the right decision for you and your business.

Employee

As an employee of a business working from home you are able to claim the same amount as the business owner of a limited company.  This is £4 per week at a flat rate for the 2019–2020 tax year, or £6 per week at a flat rate for the 2020-2021 tax year. However, it is important to note that you can only get this if your employer agrees. If your employer does not agree with this payment you are able to claim the tax relief directly from HMRC.

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As with business owners of limited companies and sole traders, there are other expenses that you can claim for as an employee. These expenses include IT and software costs from working from home, a business mobile phone contract and any postage or stationery costs. When looking to claim for these expenses it is essential you remember these costs must be used for business use only. If you use your mobile phone for personal and business use, the expenses claim will differ.

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Sole Trader

When looking to set up a home office for tax purposes as a sole trader you will be able to claim the cost of working from home, but it differs based on hours worked. If you are working between 25 and 50 hours a month from home you can claim £10 as a flat rate per month. Those sole traders working from home between 51 and 100 hours a month can claim a flat rate of £18 per month. Finally, if you are a sole trader working 101 or more hours a month from home then you can claim the flat rate of £26 per month. These are recorded as an expense. This will then reduce your personal tax. You may also be able to claim a proportion of your home telephone and internet bills on top of this.

There is another way to set up a home office for tax purposes. You can claim a proportion of all your bills while working at home. This can include your rent, council tax, electricity, water, gas, internet and phone as well as the interest on your mortgage.

The way to work out the proportion of your claim is to add up all the costs of the above bills and find the percentage used by your business. In many cases this will just be one room in your house. If the total costs for all the above come to £6,000 and you have 6 rooms in your house, and one is used for your business, this is 12.5%. This comes to £750. You then need to calculate how many hours you used this room each week for your business. In this example we will say that you work 42 hours a week from the room on your business, out of a possible 168 hours. This is 25% and works out at £187.50. This means you could claim £187.50 per annum.

In this example you would be better off on the base rate option. As explained previously, in this example you would get £312 on the base rate. This is why it is so important to talk to an experienced accountant. They will help you understand the best way to set up a home office for tax purposes.

If you are considering the options for you and your employees working from home in the long-term, contact our team now. We will help you put the right processes in place to ensure it works for you, your business and your accounts.