What home office expenses can I claim as a limited company contractor?
In the past decade, the number of people in the UK who have ditched the commute and confines of the traditional office and instead, chose to work from home, has doubled to nearly 1.54million.
There’s no doubt that many of these home-workers are freelancers and contractors who, unlike employees, tend to have greater freedom to work remotely, often from the comfort of their own home office, annex or living room.
What matters much more as a freelancer or contractor operating through your own limited company than the particular space you’ve chosen is that you claim the appropriate expenses for running your business from home, writes Troy Stevens, director of QAccounting.
In this article, we’ll explore the options available to you when claiming home office costs against your business, before explaining how you should go about calculating and claiming these expenses.
You have two options:
‘Flat rate’ method
The first option is called the ‘Flat rate’ method, and is based on HMRC’s standard allowance of either £4 per week (equating to £208 per year), or £18 per month (£216 per year). As you can probably guess, this is the simplest, fastest way of making a claim for home office usage and you do not need to provide receipts to prove the expenses. This is often the route taken for time-poor freelancers and contractors who would rather reduce the administrative burden of monthly record-keeping!
Your other option for making a claim for home office usage is on a ‘receipts basis.’ If you have a high amount of household expense as a result of working from home, this is certainly the more beneficial of the two methods, and it tends to allow you to claim accurate expenses.
Before you weigh up whether claiming on a ‘receipts basis’ is right for you, it’s important that you have a firm idea of what specifically you’re able to claim as a business expense when working from home.
As you can imagine, HMRC is very strict on allowable home office expenses. These are:
- Mortgage interest: note that only the interest element is tax-deductible and not the full mortgage repayment amount
- Council Tax
- Utilities, such as gas, water and electricity
Is broadband a legitimate expense?
Frustratingly, internet and broadband costs are only allowable in HMRC’s eyes if you have upgraded your existing package. If so, it will then only be the difference which will be tax-deductible.
Existing broadband contracts are not deemed to be claimable. HMRC will argue that these contracts were in place already and used in a personal capacity, whether or not you work from home.
What about office equipment?
If you are using part of your home as office space for business purposes, you’re entitled to claim expenses through your limited company in the form of office equipment and fixtures and fittings.
This will include items such as computers, laptops and monitor screens, which will be classified as legitimate office equipment costs.
When kitting out your home office, things like tables, chairs and filing cabinets used for storage will form part of the fixture and fittings. Again, these are allowable expenses.
It’s important to note that office equipment, fixtures and fittings must be used wholly and exclusively for business usage if they are bought by your limited company.
Personal usage must be minimal, as significant usage could be seen to be for dual purposes. In short, this will mean ‘benefit-in-kind’ tax implications will apply for both the company and the individual.
Any office equipment or fixture and fittings costing in excess of £500 are usually capitalised as an asset for accounting purposes. Therefore, these will be represented as a ‘Balance Sheet’ item in your company’s accounts, as opposed to items costing under £500 which are presented on the company’s ‘Profit & Loss’ account.
That said, both types of expenditure will qualify for 100% corporation tax relief, which is applied in the first year of purchase in your company’s financial statements and tax returns.
How do you calculate the ‘receipts basis’ method?
To work out whether the use of your home as an office expense is more beneficial on a ‘receipts basis’ or the ‘flat rate’ method, you need to gather the following five pieces of information:
- Total number of rooms in the household, including bedrooms and bathrooms
- Number of rooms being used for business purposes
- Number of hours per day on average worked from home
- Number of days per week worked from home
- Copies of bills in relation to mortgage interest, council tax and utilities.
By providing the above details to your accountant, they will be able to calculate which method is beneficial for your limited company. Alternatively, if you want to work this out yourself, here’s the all-important calculation you need to do so:
Total annual cost of eligible household bills ÷ number of rooms in the household = cost of room for business use. Then, cost of room for business use x number of days worked per week in that room x number of hours worked on that room on average.
Whether you run these numbers yourself or enlist help from an accountant, and whether you go ‘flat rate’ or ‘receipts basis,’ good luck and happy home working!