Contractors' Questions: How much to claim for my home-based office?

Contractor’s Question: An independent IT supplier who I know told me that he gets a significant chunk of expenses solely through working out of his home-based office. I’m concerned that I might be missing out because, following a review by my accountant, I am restricted to the paltry sum of a few pounds per week, even though I also have an office in my house. I too supply IT services, so has my accountant got it wrong, or is my colleague over-claiming?

Expert’s Answer:  There are two schools of thought on the use of home-as-office expenses. Be sure you are aware of the facts, which largely relate to the nature of your business.

You can claim £4 per week or additional variable costs if use of your home-as-office is substantive - as per school one - or you can claim a proportion of the total expenses, depending on the usage - as per school two.

Let’s look at school one. If you run a small (i.e. a director and sole employee) service company for example, in order to claim anything over £4 p. w. for a home-as-office you must have a need to carry out a substantive percentage of your employment duties from your home-office and should not be able to carry out the same duties at your client’s site.

If you could work at the client’s site but choose to work from home instead this will not count in your favour. However, if your home-office is your main place of work then you are allowed to claim additional expenses incurred for:

  1. Gas / electricity;
  2. Metered water costs (but not if you have a fixed charge for water rates);
  3. Business phone calls (including dial up internet access).

Please note, you can claim £4 p. w. towards water and gas/electricity without showing any evidence. You are not allowed to claim any fixed expenses associated with running your home, however, such as Council Tax, rent or mortgage interest. Further details are available from HMRC, specifically under EIM 32805, EIM 32806 and EIM 32807.

Now let’s look at school two. As per Section 34 of ITTOIA, the self-employed (or an individual seen as self-employed under the guidelines) can claim a proportion of expenses for use of their home-as-office.

Under this approach a proportion of the total expenses associated with your home-as-office can be calculated alongside the amount of usage, so the amount depends on a calculation of the percentage of space and usage, which you can work out. More details of what I’m referring to as school two can be found on HMRC’s website.

In conclusion…

Based on plain reading, it would appear that only the self-employed can claim home-as-office expenses and not directors of limited companies. However, we strongly believe that many directors of small companies do use their home-as-office extensively for business use and that, therefore, these individuals can be classified as self-employed.

In practice, many contractors use their home-as-office extensively and, therefore, do make substantive use of their office at home. This means that many small businesses are in fact in this context “self-employed” and, therefore, can use the guidance under school two, although, be warned, in the future there may be a risk of an HMRC backlash.

However, even in the worst-case scenario, HMRC may disallow the additional claim for use of home-as-office. Even so, we have found HMRC to be flexible in the last couple of investigations. It is not, therefore, a huge issue that you need worry unduly about.

To sum-up: those who make substantive use of their home-as-office can use school two, concluding that the home-as-office is the place where they most often carry out their employment duties. This means that contractors and other small businesses that make substantive use of their home-as-office are well within their rights to claim regular expenditure. On the other hand, if in all honesty you rarely or in effect hardly ever use your home-office, then we recommend that you err on the side of caution and stick to £4 p. w.

The expert was Sumit Agarwal, founder and managing partner at DNS Associates, an accountancy firm specialising in contractor tax affairs.

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