Chartered accountant Richard McDermott lifts the lid on deductible expenses and how to claim them
A 2017 report from the Centre for Economics and Business Research reveals that there are 2.7m home-based businesses in the UK, a rise of 40% since 2000.
With record numbers starting up, the number of home-based businesses in the UK is probably significantly higher. “Not having to pay for commercial premises makes things much cheaper for business owners, while being able to claim for some costs when running your business from home will lower your tax bill,” explains chartered accountant, Richard McDermott.
What can you claim for?
In accordance with HMRC rules, to be classed as “deductible”, an expense or cost mustbe incurred “wholly and exclusively for the purpose of the trade, profession or vocation”.
“If you’re self-employed and using a room or rooms in your home for business, and you’re paying a mortgage, you can claim for a proportion of the interest - but not the capital repayment,” McDermott stresses. “If you’re renting, you may be able to deduct a proportion of your rent. And whether renting or buying, you may also be able to claim a proportion of your council tax payments.”
Other deductible expenses can include a proportion of gas and electricity payments to cover lighting and heating, adds McDermott. “You can also claim a proportion of your telephone and broadband costs or the full cost of a dedicated business telephone line and a percentage of your line rental costs.
“In some cases, you may be able to charge for decorating, furnishing or repairing rooms in your house that are used for business. Obviously, you can also claim when you buy computers, office equipment and stationery when setting up a business office at home.”
How to claim home business costs
As McDermott explains, self-employed people can make a “simplified claim” for utilities use. These don’t require owners to keep any records, but you need to work at least 25 hours per month at home, then you can claim £10, rising to £18 for 51 to 100 hours, and £26 per month for 101 hours or more. “This way you don’t have to work out the proportion of personal and business use,” he explains. “A separate claim can be made for telephone and internet.
“You can, of course, make a higher claim based on your utility bills, number of rooms you use and for how long. So, to illustrate, your mortgage interest, council tax and utility bills might come to £12,200 a year, for example, you use one of eight rooms in your house, so you divide by eight and it comes to £1,525. If you say you use the room for 70% of the time, you claim £960. The claims you make need to justifiable and provable.
“Sole traders and partnerships need to show the expense as ‘Use of Home’ in their end of year accounts. However, for limited companies it should be detailed as ‘Rent’ because companies can’t and don’t have a home; so the expense is considered rent paid by company to the director. That rent should be recorded on the director’s tax return, although expenses offset, no income tax will be payable.”
There are capital gains tax implications to be aware of, McDermott adds. “If a room in your home is used exclusively for business, there could be capital gains tax to pay if you sell your home. If the room is also used privately, as will usually be the case, there won’t. Similarly, there could be business rates to pay if a room is used exclusively for business, so some private use is recommended.”
- Richard McDermott is head of tax at Swindon-based chartered accountants Dennis & Turnbull and adviser at accounting and tax returns service provider TaxGo.