How to claim energy costs as a home-based limited company
Having to bear the cost of turning up the heating and switching on the lights when it’s still the afternoon is likely to be a necessary evil as the cold snap of New Year 2019 approaches, writes Emily Coltman, chief accountant at FreeAgent.
To ease the pain of a hefty utilities bill just as the January 31st tax deadline nears, remember that HMRC permits one-person businesses like you to use a “reasonable method” to claim a proportion of the gas and electricity costs -- in the part of the home that you use for business.
But if you're operating through a limited company, you can only claim a business proportion of your energy bills. You cannot use the so-called ‘Flat Rate’ method (outlined below and eligible to sole traders), nor can you claim any part of costs you'd have to pay ordinarily, even if you were not working at home -- rent or council tax for example.
The general rule as a company director who works from home, is that you can only claim increased costs that you incur for working at home, and then only if what you do at home earns money for the company -- i.e. not admin work.
If you're a sole trader, you'll be able to claim a business proportion of your energy bills or use the Flat Rate method to include an equivalent of them. You can also include a business proportion of other home costs such as your rent, council tax, mortgage interest (not the capital element of a mortgage), insurance and any repairs or cleaning that include the room(s) you use for your business.
The Flat Rate Method (Sole Traders Only)
The Flat Rate method is a simple way to claim the costs of energy bills and is available to sole traders and partnerships where the partners are individuals, not limited companies. It allows businesses to claim a set amount of tax relief for the business use of their home depending on the number of hours spent working at home each month. The rates are:
|Hours spent working at home per month||Flat rate per month|
|25 to 50||£10|
|51 to 100||£18|
|101 and more||£26|
The Cost Percentage Method (All One-Person Businesses, including ‘Ltd’ directors)
More typical is for both ‘Ltd’ directors and sole traders to work out the tax relief they can claim for working at home by calculating a “fair and reasonable” share of the home-running-costs to include in the accounts as a cost of the business.
Remember though, company directors can only claim a percentage of energy bills because that’s the extra cost of working at home, whereas sole traders may claim a percentage of most home running costs.
Here’s one way to work out a share of your home-running-costs.
First, count all the “normal living spaces” in the home -- so, exclude bathrooms and hallways.
If your office is separate from the main house, for example is in the garden, and is billed separately, you should treat it as a one-roomed house. If its utility costs are included in the rest of your household bills, treat it as an additional room.
Next, identify the rooms you work in. And then more than that -- work out what percentage of time spent in each room is business and personal. If you spend ten hours a day in your living room, seven hours for personal time and three hours for business, then 70% is personal and 30% is business. If you work in a dedicated room, such as a home office, you might well spend 100% of your time in there for business.
However, you should be aware that if you have an entire room dedicated to business use, you will need to pay Capital Gains tax on it if you sell your home! A neat way around this is to make the room double as something else, like a music room or a workshop.
Room to save? (cont.)
Next, get ready for some division! Although there is no HMRC guidance on how to go about dividing the cost of your bills between the rooms in your house, this calculation, as said previously, should be “fair and reasonable”. One approach is to take each of your bills separately and then divide the cost evenly between the number of rooms in your house. For example, a five-room house with a gas bill of £360 will come to a cost of £72 per room (£360 ∕ 5 rooms = £72 per room).
Lastly, you need to apply the percentage of work use to the relevant room costs. Remember, so far you’ve worked out the percentage of time you spend working in each room; and for each bill, the total cost that applies to each room.
Not to be sniffed at
Now you can mitigate your gas and electricity bills, and other costs if you’re a sole trader, by working out the business cost of each and claiming them as an expense on your self-assessment tax return. For example, if you spend 95% of your time working in your home office (for limited company directors, this ‘time spent’ must not include admin work), and the total cost of heating that room is £72, you would claim: £72 x 95% = £68.40 as business expenses. And if in the same room the cost of electricity is £40, then it’s £40 x 95%, returning £38 as business expenses. That’s a total of £106.40 saved on your energy bills! So not bad at all, and certainly not to be sniffed at during this cold time of year!