From front room to back office

Self-employment: it's better to be an accountant than a mechanic if you work from home

Working from home is not a new phenomenon: prime ministers have done it since Clement Atlee who, finding himself in government and short of a central London pad, converted rooms above 10 Downing Street into a flat.

As PMs since have found there are advantages to living above the shop. Convenience, and not having to commute, are among the more obvious. For anyone starting a business, working from home is, as often as not, a decision driven by cost. Using a spare room as an office keeps overheads and travel costs to a minimum, both important criteria in the early days.

Assuming you have the space, working from home saves on office rental and, in most cases, business rates. According to Alan Denbigh, executive director of The Telecottage Association, which represents people working from home, there are personal benefits, too. "From my point of view one of the strongest benefits is more time with my family. That's not to say that it isn't quite a balancing act but by taking up teleworking I have 'bought' myself 10 extra hours per week to use how I wish."

Making working from home a success is no mean feat of discipline, or organisation. Homeworkers complain of isolation, missing the camaraderie as well as the exchange of ideas of an office environment.

Another difficulty is keeping your personal and business life separate. Working from home blurs the normal distinctions between home and office life: for some, this is its key attraction. For others, it is a serious problem that affects their businesses or relationships.

Financially, working from home is not without its troubles either. A self-employed person might think that a home office needs just a desk, filing cabinet and phone line. But the authorities, and financial companies, are not always that sanguine.

The first hurdle might be the mortgage. Lenders could view a home office as a commercial, rather than a residential risk: commercial mortgages are, generally, a couple of percentage points higher than residential loans.

In practice lenders will tend to turn a blind eye, as long as the business only takes up a small amount of the house, and is just a "paper office". Any form of manufacturing is less likely to go unnoticed, and will probably be viewed as a commercial risk.

Banks and building societies say that they deal with homeworkers on a case-by-case basis, and they are becoming more open-minded. One general test for whether a property is seen as a commercial or residential risk is whether clients visit the premises, or whether anyone, except the owner's family, works there.

The same test applies to planning and rating. Generally, planning permission is not needed to work from home, as long as the building is still primarily a house. Some councils have issued specific guidelines for teleworkers and homeworkers, but the majority accept home offices as long as there is no nuisance to neighbours, or change to the character of an area. A mechanic operating outside a house is more likely to attract attention than an accountant or designer.

To avoid business rates a room must be used both for business and as part of the house: this can be as simple as providing an easy chair or a sofa-bed. Again, the rating office is more likely to target obvious conversions, such as outbuildings, than the spare room. Rooms used only for business might also be liable to capital gains tax based on any appreciation in the value of the property, as CGT exemption applies only to a person's principal dwelling.

Insurers are another group that do not always welcome home working. Specialist policies are coming onto the market from firms such as Tolson Messenger or ITT London and Edinburgh. Standard home insurance often excludes equipment such as computers used for business.

A specialist policy will mean more expense, partly because homes with offices are regarded as a higher risk, and partly because there is less competition.

Purpose-build office developments for the self-employed do exist, such as the Acorn Televillage in Wales. A rented office is an alternative worth considering: it keeps home and business more distinct and presents a more efficient face to clients. In time this might attract enough extra money to cover the rent.

Without proper space, small business advisers warn, a business is less likely to succeed. Sometimes, people start self-employment, assuming they can work from the kitchen table. The reality is that a quiet area, with room for storage, is a necessity. If you can close the door on it at the end of the day, so much the better.

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