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