Tax Saving Tip - No.3

This is the third tax saving tip article in the series and this tip deals with working from home and what household expenses you can rightfully claim against business profits.

Any business person that works even partially at home in the evenings/weekends can properly claim an allowance against their business for “Use of home as office”. The questions arise when the amount of the claim is considered.

As when anything to do with tax is discussed the answer is not straightforward, and is dependent on the degree of useage - and this can be looked at in two ways:-

1. A small amount of work is undertaken - for example, in the evenings organizing the next day’s meetings, or catching up with the bookkeeping once a week. This is covered by a blanket allowance of £5 per week as a level at which the Tax Office will not question too much. This £5/week essentially covers light, heat, space used, disruption to family life and is not specifically aimed at covering actual extra electricity used for example.
2. A large amount of work is done at home all the time - for example the business is based at home and doesn’t have a seperate office. This level of use justifies apportionment of electricity and gas bills between business and private use, extra refreshments used and cleaning of the office space.

More and more businesses are choosing to work at home and so a little more thought needs to be given to justify the level of business use of various services to be charged against profits. Well, gas and electricity are easy to fathom. Just compare the increase in your bills from before the office was established. If you can’t do that, come up with a considered aguement looking at extra useage during the day with lights/heating on, computers on, kettles/coffee machines in constant use - things like that and discuss these arguements with your accountant - or me directly to see if you are charging as much as can be justified.

I never suggest people fall into the trap of apportionment based on floor area. If you start saying that about 1/6 of your house is used for business so 1/6th of all bills are business - the Tax Office say that 1/6 of your home is no longer a personal asset exempt from capital gains tax and when you sell it they will look for 1/6 of the profit to be taxed.

Also, for most businesses, a floor plan apportionment doesn’t give nearly enough weight to the extra electricity in particular that working from home can use and so you lose out. Don’t use this then!

As far as other expenses are concerned, they are usually much easier to keep track of. Installation and costs of running a business phone line for example, refreshments, extra cleaning etc..

The moral to this tip then is to claim as much for working at home as you and your accountant can justify. This is one area looked at during investigations so having your methods all set out beforehand knocks the question flat as soon as HMRC raise it. Why do they look at this? simply because businesses are generally unprepared to answer specifically and quickly exactly how the claim is formulated leaving themselves open to the claim being challenged and ultimately disallowed.

Be different - be prepared!

Ray Stewart