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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.

business-owner

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.

employee-home-working

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.

2020 Budget: What it means for businesses

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The chancellor Rishi Sunak has delivered his first budget on the 11th March 2020, but what does it mean for UK businesses?

Tax cut on national insurance

As promised in the Conservatives manifesto the national insurance threshold will increase from April. This will not only affect the self-employed and Directors of limited companies, but anyone who

is employed will enjoy this tax break. The table below shows the changes:

Annual National Insurance Threshold Monthly National Insurance Threshold Weekly National Insurance Threshold
Current £8,632 £719.33 £166
From April 2020 £9,500 £791.67 £182.69
Increase £868 £72.34 £16.69
Tax Saving £104.16 £8.68 £2

 

With the personal tax allowance set to stay at £12,500 per year, this means that anyone earning up to £9,500 will not pay any tax at all in the 2020-2021 tax year.

VAT changes

There have been a few changes announced on VAT in the budget:

  • 5% VAT on women’s sanitary products is to be scrapped from January 2021 – this is also referred to as the “tampon tax”.
  • VAT to be scrapped on digital publications including newspapers, books and academic journals from December 2020.

Coronavirus statutory sick pay and interruption loan

It has already been announced that if employees self-isolate to help contain coronavirus then they will be paid statutory sick pay from the first day off work, which is to be paid by the employer. However if you are a smaller business with fewer than 250 employees the government will pay the first 14 days of isolation. Small businesses will need to reclaim the cost of the statutory sick pay.

For those that are self-employed and not eligible for statutory sick pay, they will be able to claim employment and support allowance from day one rather than day eight.

The government has also introduced a business interruption loan for small businesses affected by Coronavirus of up to £1.2m

Pension tax relief changes for higher earners

Currently the tapered annual allowance threshold for pension tax relief is £110,000, which means anyone earning over this amount sees the tax relief on pensions reduced. From April this will increase to £200,000.

Business rates

The chancellor has announced that tens of thousands of England’s retail, leisure and hospitality companies will not need to pay business rates in 2020-21.

Eligible businesses are those that have a rateable value of less than £51,000, this is made in a move to help the high street and those that will be hit hard by Coronavirus causing a lower footfall. This applies to shops, restaurants, cafes, small hotels, nightclubs etc.

In addition the government have pledged a £3,000 cash grant for smaller businesses currently eligible for the small business rates relief.

Corporation tax

There was a planned reduction in corporation tax to lower it to 17%, however this has been scrapped and the rate of tax will remain at 19% for 2020-21.

Entrepreneurs’ relief

There were rumours that entrepreneurs’ relief was going to be scrapped however it has been retained at the rate of 10%, however the lifetime allowance will be reduced from £10m to £1m.

At Direct Peak accountants, we aim to do much more than just help you meet corporation tax compliance. We communicate with you throughout the year, not just at year end.

Contact our team now to see how we can help you implement the changes from the 2020 Budget into your business.

Tax Planning in Peterborough

Tax Planning in Peterborough

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Tax Planning in Peterborough

Some business owners experience a quieter period in the run down to Christmas. While some business owners find this to be an uneasy period and worry about what they can do, other business owners embrace this quieter period to get things in order for the year ahead.

In this blog post we would like to look at tax planning. Tax planning should be on your year end accounting checklist. It should also be something you look at and review during quieter periods of the business to check you are on track.

Here at Direct Peak we help with tax planning in Peterborough. We help you get an analysis of your financial position from a tax perspective. This will help you ensure your business pays the least amount of tax that the law allows.

By completing some tax planning in Peterborough at the end of the year you can accelerate expenses you were planning to buy early in the New Year. For example, if you have software subscriptions or memberships that need to be renewed, you can do these before the end of the year and this will help increase your expenses and lower your taxable income.

If it is possible to defer sending invoices to customers until January, then do so. This will help make your taxable income lower than if you were to send these invoices in the current year.

These are just some of the basic legal tax strategies that you can try. However if you would like to know about some of the more in-depth tax strategies that will really help you gain some big savings on your tax we would recommend you speak to a tax accountant in Peterborough.

A tax planning accountant in Peterborough, like the team here at Direct Peak, will help you create and optimise your tax planning for the year ahead. They can also help you put together an end of year checklist to ensure that your business and accounts are all in order.

Remember – what you do at the end of the year for your business will help the success of your business in the New Year!