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New guidance issued on working from home

This is an abridged version of an article taken from AccountingWeb. To view this article as written on the AccountingWeb website, please open this link - if it is still available online.

Self Assessment: New guidance issued on working from home. By Nichola Ross Martin

According to the updated Business Income Manual, it is now OK to claim a great deal more expenses in relation to self-employed home working than you might have ever contemplated. You may now claim a proportion of telephone line rental on a domestic phone, a proportion of exterior house repairs, in fact almost every self-employed person will be able to claim something, even if it is only £2 per week.

What is the reason for HMRC’s change of heart?

It is really a change of emphasis...

As this is tax, you need to establish the underlying facts, and different traders organise their businesses in different ways, (so this rules out the idea of flat fixed rate deductions), it depends on the expense incurred. It is a question of apportioning the relevant expense HMRC suggest:

• Area: what proportion in terms of area of the home is used for business purposes?

• Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.

• Time: how long is it used for business purposes, as compared to any other use?

HMRC point out that expenses broadly fall into two categories, fixed costs and running costs.

Fixed costs relate to the whole house and have to be paid even if there is no business use. These include costs such as, Council Tax, mortgage interest, insurance, water rates, general repairs and rent. If part of the home is set aside solely for business use for a specific period then a part of these costs is allowable, these will need to be apportioned by area and time, as follows:

Insurance – apportion part of the domestic policy (unless there is a separate business policy)

Council Tax - apportion

Mortgage interest – apportion interest (not repayments)

Rent - apportion

Repairs and maintenance – apportion, including interior and exterior decoration and roof repairs.

*There is no detail on fixed water rates, but it is assumed that these can be apportioned. The manual later says: “In the case of minor business use of the premises, such as writing up records, there is no business use of water and so none of the water charge is allowable.” This does not square up with the revised guidance, but the cost is going to be so small that I would not worry about it.

Running costs relate to expenses where the bill may vary with the amount of business use. They include telephone line rental, cleaning, heat and light and metered water. HMRC officers are now instructed to “accept a claim based on any reasonable basis.” Apportionment should be on the basis of useage.

Telephone - The big change is to the treatment of telephone line rental. Instructions are to now allow a proportion of the line rental (based on the ratio of business use to total use). This proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure.

BIM47825 gives some examples of what is claimable. It notes that “if there is only minor use, for example writing up the business records at home, you may accept a reasonable estimate without detailed enquiry.” The examples reproduced here are HMRC’s, the comments in italics are mine.

Example 1

Angela writes up her business records at home. She uses a room solely for business use for a short period each week. She estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.

Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.

Example 2

Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade (he needs to ensure he knows the CGT treatment here). The room represents 5% of the floor area of the house.

His Council Tax, insurance and mortgage interest bills total £4500. He claims 5%, £225.

His electricity bill for heating & lighting is £300. He claims £15, which is 5% of the total.

His total claim is £240 (plus the business proportion of his phone bill).

Although Bill has apportioned his electricity bill by floor area rather than usage, the amount claimed is small and there is nothing to suggest that his business use is significantly greater or lesser than his private use. It can be accepted as a reasonable estimate.

Most people will not be able to estimate floor area, so another basis such as by no. of rooms may be more practical. It might be easier to claim the running costs according to useage time, or to do some test readings and apportion those.

Example 3

Bert runs a small business. He uses the spare bedroom at home as his office except for a week at Easter and a week at Christmas. All he does is to write up his records, once a week.

The house has 10 rooms. Bert calculates that his business expense, based on 1/10 of the total costs would be £450. Bert recognises that this is far too much for what he actually does at home.

Bert estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.

Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.

Example 4

Chris is an author working from home. She uses her living room from 8am to 12am. During the evening, from 6pm until 10pm it is used by her family. The room used represents 10% of the area of the house.

The fixed costs including cleaning, insurance, Council Tax and mortgage interest, etc total £6600. A tenth of the fixed establishment costs is £660. For the purposes of fixed costs, one sixth (4/24) of the use by time is for business, so Chris claims £110.

She uses electricity for heating, lighting and to power her computer, which costs £1500 per annum. Chris considers an apportionment of these costs by time and area. A tenth of the costs are £150 and half of these costs by time (4/8) relate to business use, she claims £75.

She also uses the telephone to connect to the internet for research purposes. Her itemised telephone bill shows that a third of the calls made are business calls. She can claim the cost of those calls plus a third of the standing charge.

Example 5

The facts are as in example 4. Chris has some work done on the house. She has the exterior painted and at the same time has the dining room re-decorated. What, if anything, can she claim as a deduction?

The exterior painting is a general household cost. She can claim a proportion based on business use. Chris does not use her dining room for business purposes. The cost of redecorating the dining room is not an allowable expense.

Example 6

Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours. The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.

After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480). The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.

Example 7

Bill entertains a number of customers at his home. Each time he hires caterers and also a firm of cleaners. Although Bill has used his home for business purposes, he cannot claim any of the costs as there is legislation that disallows entertaining costs.

Comment

It is great to have some examples at last, and this will put an end to all those arguments with officers about duality and mortgage interest! On saying that, do remember that HMRC’s manuals are only their interpretation, they are no replacement for the actual statute and you cannot rely on them in court.

The best selling Practical Tax Guide - "What expenses can I claim, when working from home" by Nichola Ross Martin compares and contrasts deductions from the point of view of the self-employed, the employee and the director.

For subscription details please email nicki@rossmartin.co.uk

AccountingWEB 18-Jan-2007

Nicki Ross Martin

Article Copyright © 2001 Sift Group Ltd. All rights reserved.

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This is an abridged version of an article taken from AccountingWeb.

To view this article as written on the AccountingWeb website, please open this link - if it is still available online.
Posted to www.PayLesstax.co.uk on 23 January 2007

 
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