Directors running a business from home
By Wendy Tate, Dec 2 2020 10:33AM
If you’re running a limited company from a commercial office space, any costs you incur such as rent, business rates, utilities, insurances and service charges are allowable overhead costs for the business which reduce the business profit an in turn reduce the corporation tax liability. So, how does it work if you don’t have commercial office space and instead choose to run your company from your home?
As a Director working from your home, you’re allowed to claim certain costs back from your company for the provision of the home office space. There are two ways of doing this, if you want to keep things simple you can choose to claim the HMRC fixed home working allowance which is £6 per week from the 2020/21 tax year. Over a full year at £6 per week this would be worth £312 in total.
For many Directors’, however, the actual cost of providing their home office space to their company is a lot more than £6 per week, this being the case they could claim a fair proportion of their home running costs instead.
In order to facilitate this there will need to be an agreement in place between the Director and their limited company to formally outline that the limited company is permitted to use a specific space in the home and that rent will be paid by the limited company to the Director for its use.
The typical tax planning strategy is to only charge a fair proportion of the running costs of the property the ensure the Director is not making a profit on the home office which would mean there would be no personal tax impact as a result of the arrangement.
What costs can be included in the working from home calculation
The typical costs that can be considered are:
• Council tax
• Service charges
• Electricity & gas
• Contents insurance
You may have noticed that only rent included above but not mortgage payments.
Mortgage capital repayments have never been allowable however in the past mortgage interest payments were allowed to be included in the calculation this is no longer permitted due to the relatively new restriction of finance costs relief for individual landlords which is now fully in place for the 2020-21 tax year so no mortgage costs can be included in working from home claims. The restrictions on mortgage interest mean that working from home claims are likely to be higher for someone who is paying rent compared to someone with a mortgage.
How to calculate a fair proportion of the home running costs
The simplest way to work out what proportion can be charged to the business is to look at how many rooms you have in your property excluding bathrooms, kitchens and hallways, then work out what % of the time you use one (or more) of the rooms for business use.
If you are renting only part of a property (e.g. a house share) then you should only include the rooms that you have access to in the calculation.
As an example, if we assume that you use one of your rooms as an office for your company and 80% of the time that it’s in use is for your business, and we also assume that in total you have 5 rooms excluding bathrooms, hallways and kitchens.
If the total allowable running costs of your home per year are £10,000 it would therefore be fair to claim £10,000 / 6 rooms x 90% business use = £1,500.
This would mean you are charging £1,500 per year to your company for rent but you personally aren’t generating a rental profit because the £1,500 of property income is offset by £1,500 of allowable property costs.
Tax efficiency of claiming home office expenses
In the example above where the home office claim totaled £1,500, lets compare paying yourself this £1,500 as a home office claim, compared to £1,500 of dividends.
Assuming you’re in the basic tax band and have used up your personal allowance and dividend allowance, £1,500 of dividends would be taxed at 7.5% which is £112.50 of personal tax. If you’re in the higher tax band then the dividend tax rate would be 32.5% which would mean £487.50 of personal tax.
However, £1,500 of rental income would not result in any personal tax (because you have not generated a rental profit due to only claiming a fair proportion of the allowable property costs) and your company would also save corporation tax on the expense – at the current corporation tax rate of 19% this would reduce your corporation tax by £285.
A few things to consider:
• For the home office cost to be allowable as a deduction for corporation tax purposes, the rental charge mustn’t be above a fair market rent. You should for similar office spaces in your area.
• Ensure you don’t use your home office exclusively for business use – keep at least a small element of the room for personal use as this protects you from capital gains tax issues in the future.
• Check your home insurance policy to make sure running a business from home doesn’t cause any issues.
• If you are renting a property check your rental agreement to make sure you’re allowed to run a business from your home.
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