In this sample excerpt from the newly updated guide ‘Tax Tips For Company Directors’, Jennifer Adams looks at the rules around using part of your home as an office and how to claim tax relief. Learn more about this popular tax saving report today.
Standard claim
Many employees including directors use their home as a working base. If so, HMRC permit payments by the company of £6 per week as 'additional household expenses' to be paid 'tax free' without the need to substantiate the figures.
If no home allowance is paid by the company then the director can claim the £6 deduction on his or her own tax return. It is not enough for the expense to just be relevant to the employment, or incurred in connection with the work - it must be 'wholly, exclusively and necessarily' incurred.
Alternative claim
There is an alternative to claiming the flat rate £6 a week; a higher claim will be in point if actual costs are greater than the 'de minimus' amount.
Typically, HMRC will allow a higher claim so long as the amount has been calculated on a reasonable basis, and that such claims are not excessive. One calculation method is to estimate the proportion of the home used for business purposes (either as a fraction of the total number of rooms, or by floor space - bathrooms’, kitchens' and hallways’ excluded), and claim back that proportion of general household expenses which can be based on previous years bills (electricity, gas, council tax, rent/mortgage interest but not the capital repayment made).
Depending upon the size of the property and mortgage, these pro-rata costs invariably result in a higher claim than that allowed under the other more basic £6 per week claim. Evidence of why a claim in excess of the £6 a week will be required to support this higher claim.
HMRC has set out their view on what can be claimed for use of home as an office in the on-line Business Income Manual at http://www.hmrc.gov.uk/manuals/bimmanual/BIM47800.htm.
Company paying rent
Another way of withdrawing tax-free money from the company is where a director uses a room in his home as the company office. The room need not have exclusive use as an office, so long as when it is used it is used for business purposes. The company pays rent for the use of the room claiming full corporation tax relief.
Obviously, HMRC do not have the legal power to tell a landlord how much rent to charge, however, as the property will be rented to a ‘connected’ person it is likely that HMRC will ask for confirmation that the rent being charged is at a commercial/market. If the rent is less than the market rate then HMRC will enforce the rules which centre round the amount of expenses that can be claimed as a deduction from the rental income received and not allow the full amount of expenses incurred. However, as a concession HMRC will allow the landlord to claim a total amount restricted to the rental income derived from that property. Expenses incurred in excess of this figure are not allowed to create a loss, neither can they be carried forward to be utilised in any future year; they are, therefore, wasted.
Payment can be monthly, quarterly or annually, evidenced by the payment being made from the business bank account to the personal current account rather than as a credit to the directors' loan account because this will create a clear distinction between company money and personal money. There should be a formal written rental agreement between the owner/occupier and the business itself stating that the agreement is for at least one year applying to non-exclusive use of the room as an office. If there is only infrequent use of the office then further pro-rating is required.
Practical tips
- It would be preferable for a room not to be given over solely to business use, as this could result in a restriction on the capital gains tax principal private residence (PPR) relief claim on sale. PPR cannot be claimed for any part of a main residence used exclusively for business use, but on the other hand, the gain relating to the use of one room may be below the annual CGT exempt amount i.e. £12,300 (x 2 for a couple) and not be charged.
- The room should include some personal items (e.g. bookshelves, television, etc.) to reduce the possibility of a CGT charge.
- Business landline telephone and broadband costs (with an appropriate restriction for private use) are usually claimed separately such that they need not be included in this calculation.
- The amount paid under this arrangement must not be more than a commercial rent however, possibly a small profit could be made in order to satisfy the remainder of the personal allowance, assuming the 'optimal' salary'(£9,568 for 2021/22) is received (see section 2.5 'optimal’ salary amount') and a dividend in excess of the £2,000 'dividend allowance' is paid (see section 2.10 The 'dividend allowance').
