Homeworking expenses for the self-employed: Consider comprehensive claims!

Lee Sharpe looks at the basis of self-employed tax relief for working from home and warns that the standard deductions may not cover the full claim potentially available. 

Thanks to Covid-19, many more of us have been spending more time working from home. Readers will be aware that the standard allowances for employees have been made a little more generous; but so far, no similar measures have been offered for the self-employed.  

This article will set out to demonstrate that the standard rates suggested by HMRC fall well short of what might be validly claimed in many cases. 

Simplified expenses 

The simplified expenses regime is aimed at self-employed taxpayers who have adopted the cash basis for calculating taxable income and expenditure, but can also be used by those who continue to apply the traditional accruals basis of accounting.  

The only condition is that you must have worked from home for at least 25 hours’ worth of ‘core business activities’ a month: 

The main benefits of these flat rate deductions are that they are relatively easy to administer and HMRC is unlikely to challenge such modest amounts.  

What’s it worth? 

Even the maximum claim amounts to only £312 a year, or £6 a week. That is an actual tax reduction of £62 for a basic rate taxpayer, and £125 for a higher rate taxpayer. 

The flat rates claimed by homeworking employees from 6 April 2020 have now been increased to the same amount of £6 a week (see the recently-updated Employment Income manual at EIM32815). Employees have had £4 a week since 2011/12; still, the above rates for self-employment have not moved since their introduction in 2013/14, so are arguably long overdue an update themselves.  

Half the story 

Many taxpayers and their agents will claim under the flat rates set out above, but no more. However, even HMRC acknowledges that the simplified regime is not meant to replace all categories of domestic expenditure that a self-employed taxpayer might incur, such as at the Business Income manual at BIM75010: 

‘Use of the flat rate deduction for household running costs does not prohibit a separate deduction for fixed costs such as council tax (or domestic rates in Northern Ireland), insurance and mortgage interest, where an identifiable proportion can be attributed to business use…  

Use of the flat rate deduction also does not prohibit a separate deduction for telephone and broadband/internet connection costs…Note that if the private use is not significant the full cost of the telephone and broadband service can be claimed as a business expense.’ 

HMRC’s definition of ‘household running costs’ as per BIM47820 appears to be ‘expenses where the total bill may vary with the amount of trade use’. This leaves a number of substantial ‘fixed’ costs which may come into play where rooms are given over to business use for a significant period of time.  

The following table compares the taxpayer’s options: 

The telephone line may already be claimed as a business expense, for example where there is a dedicated business line. Likewise business-specific insurance (business interruption, etc.) will already have been claimed; the above claim is for house insurance. 

HMRC has traditionally resisted claims for water rates on the grounds that any actual business use would be negligible. But consider claims where the self-employment includes (say) home hairdressing, pet care or car valeting services. 

Repairs to a specific non-business area such as a bedroom should not be claimed. Overall property repairs might be apportioned, but repairs to a specific room set aside for business use should be claimed in full (although consider a disallowance for private use if appropriate) 

Apportioning costs 

One would normally apportion by reference to the number of ‘useful’ rooms in a property and by reference to use. Generally, hallways, pantries, bathrooms and kitchens are ignored, leaving bedrooms and living rooms, studies, etc.  

In most of HMRC’s worked examples, the claim is heavily restricted because the room is predominantly a private room, used for only a few hours daily, for business purposes. But I should argue that, if I have a study, or allocate a room predominantly for business use with only occasional private use, the dynamic changes, and instead of making only a modest claim for business use, I should instead make only a modest restriction for private use.  

Example: Bedroom used as an office 

Andi the Architect’s house has three bedrooms, two reception rooms and a kitchen diner (so six ‘usable’ rooms as the kitchen has a table, etc.). The porch, hallway and bathroom are ignored.  

Andi works from home 20 hours weekly in a bedroom converted to an office, with laptop, printer, business records, working papers, desk, cabinets and chair stationed there permanently. It is used as a bedroom only occasionally when guests sleep over. The ‘office’ is not particularly small when compared to the five other rooms, so a simple apportionment based on the number of usable rooms is considered appropriate, rather than surface area.  

Andi evaluates annual costs and options: 

Most taxpayers would claim only £216 a year under the simplified expenses regime. The real choice here is between £1,234 and £1,268! Even if Andi discounted her claim by a further 10% across the board for general private use, her full claim would still be five times the flat rate. 

Conclusion 

More of us are working more from home. Lockdown in particular has meant more people are setting up home offices more permanently, and this may well continue. In my opinion, too many taxpayers and some agents are considering only the flat rate simple expenses, and missing potentially much more substantial claims.  

Where considering a larger claim, it is strongly recommended that you: 

• Agree an approach with your adviser and check its validity annually; 
• Consider making substantial disclosure of the method adopted in the ‘additional information’ section of the annual tax return; HMRC does not ‘like’ home office claims above the suggested amounts and will try to overturn calculations that are not sensibly and robustly prepared.