Tax Implications Guide
It’s been quite a while since we’ve all been locked down due to the coronavirus outbreak. We’re all doing our bits, trying to keep our professional life moving forward in some way or the other. Those who have never experienced ‘Working from Home’ have also now got a taste of it. For some of us working from home is much more exhausting than being in an office cubicle for 8 hours a day; for others, it’s a delight to carry on business in the comfort of their living rooms.
The latter cluster may have already started planning to convert the favorite corner of their homes into a work-station even for the times post-corona.
However; how familiar are we with what tax implications working from home might hold? If you are not so sure about the details, then this article is specifically designed to light a bulb on your head. Let’s take this up. This would interest you more than anything else at the moment (besides the government reliefs to support businesses affected due to COVID-19, of course). We’ll discuss the implications in two parts to avoid any confusion.
Sole Trader Working From Home
If you’re a sole-trader then you will have two options as follows:
Option 1: Claim a business expense, proportional costs
Expenses like rent, electricity, water, telephone bills, etc. that incur partly for trade purposes and partly for business purposes can be allocated on the basis of a reasonable estimate. Basis of this distribution may be:
- Area (for Rent etc.)
- Usage (for telephone bill, internet bill, gas, water, electricity, etc.)
- Time (for the cost of running equipment)
If there’s an expense incurred “wholly and exclusively” for a business purpose, then it can be claimed entirely as a business expense for self-employed. For example, you took an internet connection only for its use for business purposes, and then the entire internet costs can be claimed as a business expense.
Option 2: Claim self-employed expenses at flat rates (Simplified expenses)
If you do not wish to bifurcate the proportion of home running expenditure for business and personal purposes or if you do not wish to keep a record of area of the room which is used for business purpose and the percentage of time spent in them, then this option is for you.
To ease down this mindboggling calculation, HMRC has provided simplified expenses for calculating the expenses of working from home. These expenses can be calculated using the flat rate based on the number of hours one has worked from home.
The simplified expense flat rates per month are:
£10
per month for working 25-50 hours per month
£18
per month for working 51-100 hours per month
£26
per month for working 101 and more hours per month
Points to be noted:
- These expenses cover the cost for rent, utilities, heating, lighting, and other services.
- It does not cover internet and telephone cost. Thus, for them, one needs to work out the actual proportion used for business purposes.
- The working from home simplified expenses can be claimed only if one has worked from home for 25 or more hours.
Limited company Working From Home
Now, given the fact that you conduct your business through your limited company, you have 3 options as follows:
Option 1: Claim business expenses at a flat rate
This is the most convenient option. If you don’t wish to give any explanations to HMRC regarding the expenses claimed for working from home, you can simply claim the deduction at a flat rate of £6 per week, or £26 per month for monthly paid employees, (exclusive of the cost of business telephone calls) for the period you work from home.
If you wish to deduct at a flat rate more than £6 per week/£26 per month then you will be expected to keep records and to be able to show how their figure has been derived. The company will be able to claim a full deduction of the said amount in its corporation tax return, but such an amount above £6 per week would be reflected as your salary in your self-assessment tax return.
Option 2: Claim the actual cost
In the case of a director or an employee working from home, you can claim only INCREMENTAL COSTS as arising from the use of home as an office. There is no provision for claiming proportional costs as in the case of a sole trader.
However, the following expenses are not deductible in any circumstances:
| S. No. | Expense | Reason |
| I | Council tax/rates | It is a flat rate charge. It is payable irrespective of whether you work at home or not. |
| II | Rent | It is a flat rate charge. It is payable irrespective of whether you work at home or not. |
| III | Mortgage interest/endowment premiums | Mortgage interest and endowment premiums relating to the mortgage are the cost of borrowing money and not the cost of providing business accommodation. |
| IV | Insurance | It is not a cost that is incurred in carrying out the duties of the employment. It is an expense to save a later probable expense. |
| V | Water rate | It is a flat rate charge. It is payable irrespective of whether you work at home or not. |
This makes us draw a conclusion that the expenses which would have been incurred whether you work from home or not are allowed as a business expense. This shall cover the costs that are incurred for both domestic and business purposes, i.e. costs that have the duality of purpose.
Only those expenses that are incurred ‘WHOLLY AND EXCLUSIVELY’ ‘IN PERFORMANCE OF’ the employment duties shall be allowed to be claimed as a business expense. For example:
- Additional unit costs of gas and electricity consumed while a room is being used for work
- Metered cost of water used ‘in the performance of the duties’ (if any)
- Unit costs of business telephone calls.
Option 3: Enter into a rental agreement with your company
A Company is a separate legal entity from its owner. So unlike sole traders, you can enter into a contract with your own company. So this means you can enter into a rental agreement with your own limited company. The crucial point here is to make sure that it’s a formal commercial agreement with the amount of rent realistic in terms of its commercial value and must be on an ‘arm’s length’ basis. The agreement should be signed on behalf of both parties like any other business contract. In fact, we advise you to seek the help of a professional for drafting a valid rental agreement so as to avoid any complications later. You can also consider taking assistance from a local estate agent to be provided with a formal rent valuation.
In this option, the company will get tax relief for the rental payments it makes to you. On the other hand, the amount received as rent will be chargeable to tax in your self-assessment return.
Capital Gain Implications
Whether you are a sole trader or a limited company owner, it is important to consider the Capital gain implication of using the home as an office. In general, when you sell your home, you are entitled to Private Residence Relief. Thus, you are not required to pay any capital gain tax in such a case. However, if a part of your house is being used for office purposes, i.e. non-residential purposes, then the sale of your home will not be fully exempt from capital gain tax. You will have to pay capital gain on the portion used for office purposes.
Conclusion
Now that you have all the options in front of you, you can judge each of them in the light of your personal circumstances and decide how you would like to go ahead with Work from Home given its implications on your tax bills. If you still have any doubts, you reach out to our experts who can help you out in deciding the right way out.
