I seem to recall from many years back that a common practice, when preparing accounts or an income and expenditure statement for a self-employed tradesman, was to claim a round amount like £10 per week for the additional cost of working from home.
Since the introduction of the optional flat-rate allowances (FLAs) for working from home, with effect from 2013/14 onwards, the choice would now seem to be between using the FLAs and calculating the cost of business use by reference to:
- Area: what proportion in terms of area of the home is used for trade purposes?
- Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
- Time: how long is it used for trade purposes, as compared to any other use?
See HMRC’s Business Income manual at BIM47815.
The FLAs (as provided by ITOIA 2005 s 94H, inserted by FA 2013) appear minimal, as follows:
Number of hours worked Flat rate per month
25 or more £10
51 or more £18
101 or more £26
If I worked about 25 hours a week at home, say 5 hours a day, I would expect that the additional cost of doing so would be rather more than £26 per month, even in summer when the heating is off. So firstly, let’s look at what is included in FLAs.
Surprisingly, perhaps, the legislation itself does not actually state what expenses the FLAs are intended to cover. Arguably, the reference at section 94H(1) to a deduction ‘in respect of the use of a person’s home for the purposes of the trade’ (my italics) is referring to services the cost of which is measured by usage, i.e. heat, light, power, telephone and internet/broadband and that seems to be the view taken by HMRC (at BIM75010). However, the guidance does also state that a separate claim may be made for fixed costs such as council tax, insurance and mortgage interest.
The legislation also does not attempt to define what ‘work’ qualifies for FLAs except that it refers to ‘hours spent wholly and exclusively on work done by the person…wholly and exclusively for the purposes of the trade’. The HMRC guidance appears to go further in restricting the deductions to what it refers to as ‘core business activities’ (this term is not used in s 94H) of:
- providing goods and/or services;
- maintaining business records; and
- marketing and obtaining new business
So, reading Tax Insider or professional journals in order to maintain one’s knowledge base, would not count, presumably, unless this was in the course of an actual assignment! And in that case would ‘maintaining business records’ count as ‘work done by the person’, and if so why not technical reading which most of us do not do other than for professional reasons? All I can suggest to anyone who opts to use the FLAs at all is to use common sense, since the legislation does not attempt to further circumscribe what are already rather niggardly allowances, except in the terms I have quoted.
The ‘standard deduction’
The relevant legislation (ITTOIA 2005, s 94H) provides the option of using FLAs as an alternative to what it refers to as the ‘standard deduction’, i.e. calculated by apportioning all the relevant expenses to arrive at the approximate cost which is regarded as having been incurred ‘wholly and exclusively’ for business purposes.
So if one were to do a ‘pukka’ calculation of the cost of business use of home, what expenses would one include? The HMRC guidance (at BIM47820) groups these under two headings:
Fixed costs
- Council tax
- Mortgage interest
- Rent
- Repairs and maintenance
Running costs
- Cleaning
- Heat, light and power
- Telephone
- Broadband
- Metered water charges
HMRC guidance at BIM47825 gives a number of examples which are useful inasmuch as if one adopts a similar approach this is unlikely to be challenged.
Repairs and maintenance would include, for example, roof repairs or outside repainting, but not redecorating a room unless that room was used for business.
Telephone and broadband should reflect the ratio of business to private use. The apportionment of light and heat could be made in a similar way to the apportionment of fixed costs i.e. based on the number of rooms or area used and the extent of business use by reference to time. However, I have one ‘niggle’ about that. I prefer to do my work at the office but if I do work from home, I work in my extended dining room/kitchen. In my view, the cost incurred ‘wholly and exclusively’ in doing so is the additional cost incurred. In winter, I would naturally have the heating on and while I am only using the dining room/kitchen, obviously the central heating heats the whole house. No-one else would normally be in the house during those hours and so an apportionment based upon the use of one room would, in my view, be confusing the object of the expense with its effect.
In HMRC’s Example 4 at BIM47825, the apportionment of the cost of heat, light and power for the room used for business reflects 4 hours daily business use and 4 hours use for family purposes and so the apportionment is 4/8. That is fair; however, another small ‘niggle’ I have is that Example 4 arrives at the proportion of fixed costs attributable to business use on the basis that they accrue around the clock and so only 4/24 is allowable. That approach, though, is at odds with Example 6 (see below), where in somewhat similar circumstances the fixed costs are apportioned based on hours of business use over total hours of actual use. The latter approach appears to me to be the correct one where a room is used for both business and private purposes - but not at the same time. During the time a room is used for business purposes it must be used ‘wholly and exclusively’ for those purposes, otherwise there would be a ‘dual purpose’ and no amount could be claimed.
Where a room is used exclusively for business then it ought to follow that the fixed costs, at least, apportioned to that room should not be restricted by reference to hours of business use. That appears to be recognised in HMRC’s Example 6 at BIM47825 which concerns an architect who has a room available for business use during normal office hours from 9 a.m. to 5 p.m., although, allowing for site visits, the actual business use is 4 hours per day; in addition to which the family use the room for 2 hours in the evening. The fixed costs for the room are apportioned as to 8/10 for business, while variable costs, light and heat, are apportioned 4/6, the first apportionment reflecting the number of hours the room is available for business use and the second reflecting the actual use.
That might not be appropriate if business use is only, say, 2 hours a week even if the room is not used for anything else (see Example 3 at BIM47825), but it would seem to follow that if, in Example 6, the business use had been exclusive the whole of the fixed costs apportioned to the room would have been allowable.
Practical Tip:
This article is largely based upon the HMRC guidance at BIM47800 onwards but, except as explained, the guidance seems reasonable, given that the end result will usually be a quite modest deduction. And given also the professional costs of the exercise, it might in some cases be expedient to adopt the FLAs (and there might be a separate deduction for fixed costs on top).
There is a cross reference at BIM47815 to FLAs at BIM75010, so the guidance has clearly been updated, however while £10 per week might now be over-egging it, a couple of the examples at BIM47825 accept very modest amounts on a de minimis basis and presumably that guidance still stands.
