New dividend tax: how contractors can prepare - charging company for WFH premises

[d000hg]

@WordIsBond - thankyou for the detailed reply, but can you back it up with anything official? Different people have claimed different things and they can all sound equally convincing

When we talk about % usage by time, quite how is this worked out? e.g. even if I work every waking moment, I'm only working ~16 hours a day so technically the room is used for work 2/3 of the day. Or, is it the proportion of the time the room is used for anything? Because if you rent an office, you are not using it 24/7... this seems to immediately mean you are using a given room only 33% of the time if you work 9-5ish.

For the purpose of this thread, can we focus on actual WFH contractors like me... those who work at least 50% at home not those claiming a few quid for doing the odd day and have a home office that sits unused most of the time? This seems to make a big difference.

For my case, I guesstimate the bills including mortgage interest come to ~500pcm which would suggest a full-time use of a room comes out £50-100 proportionately.

[TheCyclingProgrammer]

When we talk about % usage by time, quite how is this worked out? e.g. even if I work every waking moment, I'm only working ~16 hours a day so technically the room is used for work 2/3 of the day. Or, is it the proportion of the time the room is used for anything? Because if you rent an office, you are not using it 24/7... this seems to immediately mean you are using a given room only 33% of the time if you work 9-5ish.

HMRC don't give an exact guide to working out. I would imagine they would want to see you have worked it out and that your calculations are reasonable. IMO, following the same guidance for working out your use of home expenses that they issue to self-employed people would be a good starting point as it would be hard for HMRC to say it isn't reasonable. Just bear in mind the allowable costs for a self-employed person might not be the same as those allowable against rental income so make sure you only proportion the right things.

For the purpose of this thread, can we focus on actual WFH contractors like me... those who work at least 50% at home not those claiming a few quid for doing the odd day and have a home office that sits unused most of the time? This seems to make a big difference.

As I said earlier I am a WFH contractor/freelancer. I'm on site at most 20% of the time but often 100% of the time I'm at home. I still only claim the flat rate. Perhaps mainly out of laziness and not wanting to go through the hassle of setting up a sub-letting agreement with MyCo or having another sheet on my self-assessment to fill out.

Just remember if you go down that route that you aren't making yourself liable to business rates on the room (this shouldn't normally be the case if you're just working from home) or CGT and take advice from your accountant on the best way of setting it up.

[jamesbrown]

Theory:

BIM47815 - Specific deductions: use of home: apportioning the expenditure

Practice:

BIM47825 - Specific deductions: use of home: examples

Don't get confused by this (for self-employed people, not applicable to incorporated businesses):

BIM75010 - Simplified expenses: use of home for business purposes

Like I said, I'm 100% WFH, did the calculations, found it wasn't worth the effort. YMMV.

[WordIsBond]

More to the point, why is this being linked to the dividend tax - nothing in the legislation makes this any more or less legal than it was before July.

So why is this suddenly a good idea now ?

If it's such a wonderful idea, why were you not doing it 5 years ago. Have you been gratuitously overpaying on tax for the past 5 years out of the kindness of your own heart.

History repeating itself - when IR35 was announced, a whole load of schemes cropped up marketed at contractors - and look at how deep in the increment some of those folks are now.

As I said, I'm doing it now. Only on a small scale, for reasons I've stated, which means the tax savings are not particularly significant.

But as I stated above, it will be worth more once the dividend tax comes in. So it is hardly surprising people are talking about it now.

Corporation tax (20%) plus dividend tax versus personal income tax (20%) on rental income. It's hardly surprising people would start to talk about it now. The rules are changing.

[TheCyclingProgrammer]

Corporation tax (20%) plus dividend tax versus personal income tax (20%) on rental income. It's hardly surprising people would start to talk about it now. The rules are changing.

It still seems like a lot of hassle for a relatively small saving.

If I charged MyCo £100/month rent (I've done no calculations so just using this as a simple example) and reduced my dividends by £1200 I'd save £90 in tax. I can't imagine a reasonable rent figure would be more than a few hundred quid at most so we're talking about a tax saving £90-£180 per year. Hardly seems worth it to me.

Another thing to consider is that this rental income will reduce your basic rate band. The £4/week or £18/month flat rate is tax exempt and therefore does not count towards your basic rate band as its not reportable income. So it makes the difference between the two approaches negligible - in fact unless you can charge YourCo enough rent to save more than £216/year in tax, it seems like you're better off just taking dividends plus the £216 use of home payment.

[WordIsBond]

@WordIsBond - thankyou for the detailed reply, but can you back it up with anything official? Different people have claimed different things and they can all sound equally convincing

Jamesbrown helpfully provided the HMRC links with a lot of the details as far as what you can claim. A company can pay its employer whatever they want for a home office. There's no rules that say they can't or place restrictions, the rules are on what reliefs an employee could claim against that income. Anything above those reliefs is rental income.

My accountant's advice was to keep the rent so low that HMRC would not challenge it as excessive and say it was employment income instead. You can do whatever you want within your accountant's advice and your own risk tolerance. If HMRC decides it is employment income, I suppose you'll end up with NI and income tax on it, so it makes sense to be careful.

When we talk about % usage by time, quite how is this worked out? e.g. even if I work every waking moment, I'm only working ~16 hours a day so technically the room is used for work 2/3 of the day. Or, is it the proportion of the time the room is used for anything? Because if you rent an office, you are not using it 24/7... this seems to immediately mean you are using a given room only 33% of the time if you work 9-5ish.

See HMRC's example #4, where a room is used 8 hours a day, four for work, and 50% is used for the time percentage.

For the purpose of this thread, can we focus on actual WFH contractors like me... those who work at least 50% at home not those claiming a few quid for doing the odd day and have a home office that sits unused most of the time? This seems to make a big difference.

Yes, I am virtually 100% WFH, and have one employee (and occasionally two) working in my home office, too. I agree that this is significantly different.

For my case, I guesstimate the bills including mortgage interest come to ~500pcm which would suggest a full-time use of a room comes out £50-100 proportionately.

You might want to check Ross Martin's calculator. NOTE: This is a calculator for the self-employed, not a Ltd Co employee/director. The director's guide is behind a pay-wall. But many things are the same.

If you really can get £50-100 / month tax relief, you absolutely should be paying yourself that much in rent (this year, next year, whenever). I can't get anywhere near that, but I've cleared my mortgage, so don't have gobs of mortgage interest to figure into it. I'm with jamesbrown, the weekly amount is the best I can really do. We're paying a little more rent than that, but the difference is income to me. But you just give money to G.O. to waste if you aren't using up the reliefs available.

If you have that level of expense which you can deduct, market rate (whatever that is) probably doesn't come into it.

As always, talk to your accountant.

[WordIsBond]

It still seems like a lot of hassle for a relatively small saving.

If I charged MyCo £100/month rent (I've done no calculations so just using this as a simple example) and reduced my dividends by £1200 I'd save £90 in tax. I can't imagine a reasonable rent figure would be more than a few hundred quid at most so we're talking about a tax saving £90-£180 per year. Hardly seems worth it to me.

Another thing to consider is that this rental income will reduce your basic rate band. The £4/week or £18/month flat rate is tax exempt and therefore does not count towards your basic rate band as its not reportable income. So it makes the difference between the two approaches negligible - in fact unless you can charge YourCo enough rent to save more than £216/year in tax, it seems like you're better off just taking dividends plus the £216 use of home payment.

It's no hassle, and you don't lose the £216.

It shows up as a £100 / month expense in your company accounts.

https://www.gov.uk/tax-relief-for-em...orking-at-home

You're an employee working from home voluntarily. Your employer is contributing to your expenses. You claim £4 a week against that. The rest is not eligible for relief, so you report it on your SA as rental income. Done. You end up with £984 in rental income, which does go against your personal allowance, if you haven't used it all, or your basic rate band.

Can you rent a room in your home to another business for £100 / month? If not, use a smaller figure.

It's less hassle than holding a board meeting, writing a corporate minute declaring dividends, and filling out a dividend voucher every quarter, or every month. Set up an automatic payment for £40 / month, or whatever you settle on with your accountant, and let it run.

[TheCyclingProgrammer]

It's no hassle, and you don't lose the £216.

It shows up as a £100 / month expense in your company accounts.

https://www.gov.uk/tax-relief-for-em...orking-at-home

You're an employee working from home voluntarily. Your employer is contributing to your expenses. You claim £4 a week against that. The rest is not eligible for relief, so you report it on your SA as rental income. Done. You end up with £984 in rental income, which does go against your personal allowance, if you haven't used it all, or your basic rate band.

Can you rent a room in your home to another business for £100 / month? If not, use a smaller figure.

It's less hassle than holding a board meeting, writing a corporate minute declaring dividends, and filling out a dividend voucher every quarter, or every month. Set up an automatic payment for £40 / month, or whatever you settle on with your accountant, and let it run.

Sorry, but I don't agree with this at all. You can't just pay yourself £x a month, call part of it "use of home" and the rest of it "rental income". For starters, you need a proper rental agreement in place between you and YourCo. YourCo isn't paying for your home expenses, its paying you a rent.

If YourCo is paying you in excess of £4/week (or your calculated additional costs) for working from home, then these additional payments are *NOT* treated as rent by HMRC but as employment income and are liable to both income tax and NIC:

See bottom section here:
https://www.gov.uk/expenses-and-bene...report-and-pay

If YourCo is renting a room for certain hours a week, then while you use the room during those hours, you aren't working from home - you're working from your company's premises. So I don't see how you can argue that you can claim the £4/week allowance while you're working from the company's premises (that room is not your "home" while your company is occupying it as a tenant, just the same as a landlord's property is not their house while they are letting it).

You're either working from home and YourCo covers the cost of your additional household expenses tax free (the £4/week flat rate or calculated additional costs) or you rent a room to YourCo and it pays you rent. You can't be doing both.

Using simplified numbers to represent next years rules, with £11k personal allowance, we'll say the higher rate is £42k and there's the separate £5k dividend allowance. We'll assume you don't want to pay higher rate tax...

Example 1: claiming use of home expenses (using flat rate for simplicity):
Salary: £11k - not taxable
Dividends: £31k - £5k tax free, £26k taxable at 7.5%
Use of home payments: £216 - exempt, not reportable income

Corporation tax saving: £2243.20 (20% of the salary + expense payment)
Personal tax: £1950
Take home: £40266

Now lets say a proportion of your monthly allowable rental expenses was £100...

Example 2: renting to YourCo, at a nominal rent equal to what you can claim as rental expenses (tax neutral):
Salary: £11k - not taxable
Annual rent: £1200 - offset by £1200 of allowable deductions on tax return
Dividends: £29.8k - £24.8k taxable at 7.5%

Corporation tax saving: £2440
Personal tax (on dividends): £1860
Take home: £40140

Example 3: renting to YourCo, at a reasonable market rate
Salary: £11k
Annual rent: £2400 - offset by £1200 of allowable deductions on tax return
Dividends: £28.6k

Corporation tax saving: £2680
Personal tax (on dividends and rent): £2010
Take home: £39990

This shows that the best take-home pay comes from just claiming use of home instead of renting. But if we take the overall figure for comparison to be take home + corporation tax saving, then you get:

1. £42509
2. £42580
3. £42670

You could increase the rent to YourCo and reduce your dividends accordingly, but all that would happen is your take home would keep decreasing whilst your corporation tax saving would increase which makes sense as you're just shifting the tax burden from YourCo to you personally, whilst making a small saving by not paying the dividend tax. On those figures you can argue that renting is more tax efficient but as I originally said, we're talking about the difference of a few hundred quid at best. Not worth the hassle.

[WordIsBond]

I ran all of this by my accountant again.

Sorry, but I don't agree with this at all. You can't just pay yourself £x a month, call part of it "use of home" and the rest of it "rental income".

Correct. So I was wrong on the £216.

If YourCo is paying you in excess of £4/week (or your calculated additional costs) for working from home, then these additional payments are *NOT* treated as rent by HMRC but as employment income and are liable to both income tax and NIC:

Also correct. It has to be rent. And I cannot set off the £216 against it, I have to set off actual expenses. I was wrong, too many things discussed in one conversation with him. I have to track expenses. I didn't want to do that, but I have to, since I've been taking rent.

But your numbers are wrong.

Salary is constant in all scenarios, so let's simplify. Let's assume a £60K profit after salary and all expenses except rent/use of home office. Take home is salary net of employee NI (we'll cheat and round it to £11K for this purpose, since it is the same in all scenarios), rent (net of any tax on rent), and net dividends after tax.

Example 1: claiming use of home expenses (using flat rate for simplicity):
Salary: £11k - not taxable
Dividends: £31k - £5k tax free, £26k taxable at 7.5%
Use of home payments: £216 - exempt, not reportable income

Corporation tax saving: £2243.20 (20% of the salary + expense payment)
Personal tax: £1950
Take home: £40266

Profit £59,784, CT £11,956.80, take home £40,266 as you said, £16827.20 retained in YourCo.

Example 2: renting to YourCo, at a nominal rent equal to what you can claim as rental expenses (tax neutral):
Salary: £11k - not taxable
Annual rent: £1200 - offset by £1200 of allowable deductions on tax return
Dividends: £29.8k - £24.8k taxable at 7.5%

Corporation tax saving: £2440
Personal tax (on dividends): £1860
Take home: £40140

If your annual rent is offset by £1200 expenses, you can still take £31K in dividends without hitting higher rate tax. So £31K dividends with tax of £1950.

Profit £58,800, CT £11,760, take home £41,250, £16040 retained in YourCo. Compared to scenario one, take home is £984 higher, retained funds £787 lower, net taxation benefit about £200.

Example 3: renting to YourCo, at a reasonable market rate
Salary: £11k
Annual rent: £2400 - offset by £1200 of allowable deductions on tax return
Dividends: £28.6k

Corporation tax saving: £2680
Personal tax (on dividends and rent): £2010
Take home: £39990

£1200 rental profit (net after tax £960), dividends are £29.8K (net £27,940).

Profit £57,600, CT £11,520, take home £41,100, £16,280 retained in YourCo. Compared to scenario #2, £150 less take home but an extra £240 in the company.

1. £42509
2. £42580
3. £42670

Take home / retained:
1. £40,266 / 16,827
2. £41,250 / 16,040
3. £41,100 / 16,280

Some benefit compared to the first example, more than you said, but not a huge difference. Most of the benefit comes from being able to claim £100 / month. If you can't claim much more than the £4 / week, you won't get a lot of benefit unless you push the rent to a pretty high (and indefensible) level.

Next year, when employment allowance is withdrawn, you could replace salary with rent. A salary of £9,800 and a rental profit of £1200 will not change income tax at all, but will save over £250, compared to a salary of £11,000, on NI.