Working from home (or WFH) is becoming more common due to coronavirus – and with it comes expenses! Whether you are self-employed or a limited company director, you are eligible to make claims.
Both sole traders and directors are offered different ways to calculate what allowances they can claim. So, our handy guide highlights the main points for each type of worker.
Calculating expenses for the self-employed can be difficult to work out. But getting an understanding can help reduce your tax bill.
Even those sole traders who normally work from an office or manufacturing unit may well have had to work from him during the lockdown. It is essential, therefore, to make sure you claim WFH expenses.
There are two methods to calculate your self-employment expenses. Make sure you use the one that gives you the highest amount, which isn’t being fraudulent!
The simplified method
This is the quickest way to calculate your expenses, which allows you to claim a flat rate for using home as a place of work. You simply work out how many hours you use your home for your business per month.
- If it’s fewer than 50 hours a month your claim will be £10 per month.
- If it is between 51 and 100 hours it is £18 a month
- And if it’s more than 101 hours it will be £26 a month.
So if you worked 55 hours per month for 6 months during lockdown your expenses claim would be £108.
The second way is a little more tricky! You need to work out how many rooms are in your house. You also need to know how many rooms you use for business (including kitchen). Then you have to calculate for what percentage of the day is spent there for business use. You then need to divide each expense by the total number of rooms in your house to get a cost per room, then calculate the percentage used for business.
So if you had a total of 6 rooms in your house, your gas bill was £600 per year and you used the living room for business use 50% of the time then you would be able to claim £50 for the year (600 ÷ 6 × 50%)
It can be complicated and more time consuming to calculate it this way but it could be more advantageous for you. We will always advise our clients about the best option. Or you can use HMRC’s own useful expenses checker!
Self-employed people can claim a proportion of expenses on a number of items including:
- Mortgage interest or rent on your home
- Utility bills (though not water unless it’s mainly for business purposes like a laundry business)
- Council tax
- Broadband and telephone costs
As a limited company owner you may need to work from home. There are 3 ways to account for home working expenses if you are a director.
Use of home expense not requiring justification
If you only work from home occasionally, HMRC can allow your company to pay you nominal expenses to cover costs. Your company can pay you as an employee £26 a month or £6 per week to cover ‘use of home’ expenses. Full details are available from HMRC’s Employment Income Manual.
Proportion of household expenses
If you need to use your home in a ‘meaningful way’ you can claim for expenses incurred. But you will have to justify claims you make.
The rules for directors differ to sole traders as you can only claim for incremental costs incurred from WFH. So any costs you would normally incur (for both personal and business use) cannot be claimed. For example, mortgage and council tax payments are not allowable.
A formal contract
The third option for directors is drawing up a rental licence between you and your limited company. It must be a commercial agreement based on your real working arrangements with ‘market rent’ being paid.
Your company will receive tax relief on rental payments but you incur personal tax on the rent received when you fill in your self-assessment return. If you co-own your home the rent must be split according to the proportion of your home that each person owns.
Before entering into a formal contract, make sure you seek professional help.
Working from home shouldn’t cost you and there are ways for you to claim expenses. But it isn’t always clear which is the best option whether you are self-employed or a director.
Any clients that need help working out the best option, should call us on 01642 927265 or email firstname.lastname@example.org. Alternatively, if you are not a client but would like our help, use our online contact form.