Using your home for business - tax guide for contractors
There is evidently some confusion and concern (and even a bit of envy!) among some contractors about using a home for business and how much can be recouped from the taxman in the process.
For contractors spending more of their time working at home (than anywhere else), or for contractors with specific business premises within their residential premises, it is likely that accurately accruing specific costs is the most worthwhile course.
The 3 factors when mainly using home as a business
This can be confusing, but for contractors who have a room set aside in their house where more than just accounts and paperwork are managed (in other words, a home-based office where a large percentage of work is done), there are three factors taken into account when calculating how much to apportion of this expense:
You or your advisor need to calculate what proportion is used for business purposes. To do this, evaluate the total square footage of the property, and then work out what percentage is set aside for business use.
You or your advisor needs to determine how much cost is incurred by the business activities in the area of the property. This is straightforward to calculate where there is a metered or measurable supply such as utility bills.
Quite simply how long, per day, is the area used for business, as opposed to any other activities that may take place.
So, where a contractor is working from home, they should calculate the proportion of the costs as set out above and charge the company a rental fee, in the same way that they would to a tenant.
Using an outside building
There are separate HMRC rules for using an outside building located on the same premises as a residential property. The office must only be used for business and not for any residential purposes (i.e. garden shed!). If there are any residential uses, the above apportionment method is to be used.
However, where a separate building is used exclusively for business activities, it will be an asset for the business and so relevant tax rules will apply. HMRC will view this office as being separate from the main residence and allow tax deductions. Also bear in mind, some of the costs of customisation or renovation may also be allowed as costs against the profits of the limited company.
The contractor’s main asset – their home
Sometimes as a contractor, the simplest course is to make an expenses claim based on a round-sum allowance for the general business use of the home, which would certainly eliminate any restriction of the much-loved Capital Gains Tax exemption. If you work predominantly on-site and only use your home to keep accounts, search for work etc, then you can claim an allowance of about £10 per week (£500 per year) for this tax year.
The above situation is hardly likely to arise when you work from home permanently. For example, if the business you carry out at your home address is one where there is plenty of business activity in terms of clients, agents, or sub-contractors visiting you.
Maximising tax breaks is something contractors often ask us about. The good news is that if you are a contractor using your home for business, they can be considerable. The best example is if there is non-exclusive business use of a room in your home, then there is a claim which can be made for a proportion of the running costs. Fortunately, this does not automatically result in a restriction to the valuable CGT exemption upon the sale of the main private residence. This is because a claim for, say, 90% business use of one room means that the room was not used exclusively for business purposes and accordingly no loss of CGT relief applies.
The bottom line is that if you use your home for work, don’t forget to add it to your costs.
Guide based on comments and guidance from the Low Tax Group, an accountancy firm serving contractors, freelancers and the self-employed.