The taxman comes home
As more people work from where they live, Geoff Everett looks at the rules for business expenses
Saturday 18 August 2001
Thanks to advances in technology, the pressures of family life and the rising cost of office accommodation, more company staff are set to join the self-employed in working from home.
But while the commuting couldn't be simpler, the tax regime is more complicated. Both the employed and self-employed will incur certain expenses as a result of working from home, and these costs must be paid from net income unless tax relief can be obtained. In the case of employed workers, the company may reimburse or contribute to the costs, but if this happens, the individual could be taxed on the reimbursement.
For the self-employed, relief is due where expenses are incurred "wholly and exclusively" for the business.
For the employed, the purchase must also be necessary for the performance of the job, not merely convenient. Working from home through choice does not entitle the individual to relief on household expenses. But working from home to meet the terms of employment is another matter.
Assuming these hurdles can be overcome, you can include qualifying expenses on your tax return to get the relief. The claim is largely based on whether you have rooms exclusively set aside for the business. Typically, the proportion of, say, a gas bill which can be claimed depends on the proportion of rooms used for business compared to the total number of rooms in the property, excluding bathrooms, toilets and entrance halls. So, if you have a six-roomed house and use one exclusively for business, you could potentially claim one-sixth of relevant household expenses.
If you do not have a specific area for business (or just have, for example, a desk and filing cabinet in part of a room), the only allowable costs are likely to be the extra light and heating costs incurred while you are working. In practice, though, the taxman does not usually query small claims once it is accepted that working from home is a necessary and regular activity. Telephone and internet bills are normally allowed when these relate to business use.
If you buy equipment such as a computer or printer, capital allow-ances (tax relief for depreciation) may be available. Interest paid on money borrowed to buy the equipment may also be accepted as a business cost, again depending on the extent to which these items are used for work. Calculate the proportion of business to private use and claim only that part which relates to work. In such cases, note when the equipment is used and for what, so that claims can be justified. (Self-assessment requires taxpayers to keep precise records about their expenses, in any case.)
If your employer provides the equipment, it gets the tax relief. However, with the exception of computers, equipment should be provided on the basis that it is purely for business, otherwise you could be taxed on the personal use element.
Claims for mortgage interest are typically restricted to the self-employed, who can charge a proportion of the interest as a business expense, again according to the proportion of the home set aside for business.
Assuming you have the space, reserving a room for your business may seem a good way to increase the tax relief on household expenses. However, the downside is the automatic loss of the capital gains tax (CGT) private residence relief for those parts of the property exclusively used for the business. In other words, if you claim tax relief on mortgage interest now, you could get a tax bill when you sell the property for the capital gain that has accrued during ownership. The bill would depend on how much the house rises in value during the period, and the proportion of that gain relating to the business area.
If you move to another home where a room (or rooms) will also be used exclusively for the business, the CGT on the first property can sometimes be reduced by claiming rollover relief (tax relief on the replacement of business assets).
Additionally, the individual's annual £7,500 CGT exemption and taper relief (whereby the tax on assets is reduced the longer they are held) may be available to reduce the bill. These tax breaks are potentially very valuable, but require professional advice.
Normally, the home worker can choose whether or not to use rooms exclusively for work. For example, using an office occasionally as a guest room should be enough to break the exclusive business use rule. However, individuals will need to weigh up the pros and cons of claiming tax relief on expenses and mortgage interest now against suffering a possible CGT bill in the future.
Geoff Everett is a tax partner at Smith & Williamson. Contact 020 8446 4371 or www.smith.williamson.co.uk
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
Shock poll shows voters believe Ukip is to the left of the Tories
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
New era of cheap oil 'will destroy green revolution'
Ukip founder Alan Sked and Nigel Farage 'begged Enoch Powell to stand as a candidate'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
iJobs Money & Business
£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...
£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...
$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager In...
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
Day In a Page
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens