Flat Rate Method
This method is a simplified calculation approved by HMRC. It asks you to look at how many hours on average you work from home a month, and gives a corresponding value that you can claim as an additional expense in your accounts:
- 25-50 hours: £10 per month
- 51-100 hours: £18 per month
- 101 hours or more: £26 per month
Positives: Quick and easy to calculate, automatically HMRC approved, no capital gains tax implications.
Negatives: Figure may be lower than actual costs, only covers light, heat and power. Further calculations are required if you wish to include other costs such as rent, water and broadband.
Actual Costs Method
Alternatively, you may wish to calculate the total cost of your monthly household bills, and apportion this by the amount of space used for your business at home.
For example, if you have 10 rooms in your home and one of the rooms is used as an office for your business, you must add up all your costs and divide them by 10. Then say that 20% of your time in that office is used for personal reasons, you would deduct a further 20% from the amount previously calculated. The remaining figure would be the allowable expense in your accounts.
Positives: Potentially higher value which is tax deductible.
Negatives: Can be tricky to calculate, difficulties can arise in distinguishing between business vs personal use, potential capital gains tax implications.
HMRC says that costs must be apportioned on a “fair and reasonable basis” between the private element of your home and the element you use for business, but what is considered as fair and reasonable can become a grey area and can potentially leave you open to further questions being raised.
Be aware: Any part of your home that is solely used for business purposes becomes subject to capital gains tax on the future sale of your home.
What costs can I claim?
Mortgage – If you are self-employed you can include a portion of the interest only (not the capital repayment).
Rent – If you are renting your home from a landlord you can claim a portion of the rent.
Council Tax – Be aware that depending on the size of your business you may have to pay business rates rather than council tax.
Light and heat – Apportion this on the size of the rooms in question as well as the number of rooms in total.
Telephone and broadband – Apportion this on your overall usage rather than per room.
Property repairs – If the repair relates solely to the part of your home used for business then you can claim 100%. If it relates to the home overall, claim a proportion of it. If it relates to the part of your home you use privately, do not claim it.
Water – If you use a significant amount of water for your business (e.g. a car wash run from your front drive) then claim the percentage of water use for business purposes. If your business only uses a negligible amount of water, you can not claim it.
Senior Client Manager at AF Tax Solutions Ltd