Use of Home expenses

Running a home office – can you claim on expenses?

The general Inland Revenue rule for claiming tax relief on business expenses is that you can only reclaim costs that have been ‘wholly and exclusively’ incurred in connection with your trade.

Typically, the Inland Revenue will allow some ‘home office’ claims as long as they have been calculated on a reasonable basis, and that such claims are not excessive. You should therefore take great care when working out your home office expenses.

The golden rule is that the expense must be genuinely for business use and you MUST keep detailed records of your workings.

Example

John runs a business from home and wants to claim business related expenses.He pays rent of £1,000 per month on his house to his landlord. He also incurs £37.50 monthly heating bills and £42.75 on electricity. He has allocated one room exclusively for business use. The room is 117sq ft. The total area of the house is 319sq ft. John works out the proportion of the room as 117 / 319 = 36.7%. He also feels that the business use of the heating and lighting is roughly of the same ratio.

So on a monthly basis John claims:-

1.36.7% of £1,000 = £367.00 for rent.

2. 36.7% of £37.50 = £13.76 for heating.

3. 36.7% of £42.75 = £15.60 for electricity.

He keeps all the workings and files them ready for any inspection from the Inland Revenue.

Potential Pitfalls – A Grey Area

If you make it clear that part of your home is dedicated for business use, this may attract the attention of the local authority Valuation Office, who may be keen to apply business rates. If that space is for “mixed use”, i.e. personal as well as business use, then business rates should not be applied.

If you sell your house, having claimed that a proportion of it has been used for business purposes, the Revenue may argue that a proportion of any gain should be subject to capital gains tax. Again, this shouldn’t apply if the room you use has mixed use, but could apply if you’ve created a dedicated office above your garage, for example.

Insurance and Mortgage companies will often ask you declare that your home is used solely for residential purposes (same goes for tenancy agreements), but if you’re running a small home office, and take out business insurance for your business-related items, you should be OK.

To avoid triggering an Inland Revenue investigation when you make your claim on your self-assessment form, you must be sure that your claim is genuine and necessary. You should only claim if the amounts involved are significant and if you genuinely do use a proportion of your home solely for running your business. You should be prepared to provide full calculations for any expenses claimed.