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Mark McLaughlin CTA (Fellow) ATT TEP comments on recently updated guidance from HM Revenue & Customs on claims for use of home as office by the self-employed.

The current position

HM Revenue & Customs (HMRC) recently updated guidance in their Business Income Manual regarding deductions by the self-employed for use of home as office.

The fact that HMRC accept that ‘use of home’ claims can be made for parts of the property with business and non-business use provides welcome confirmation of the position. HMRC originally wrote to some self-employed taxpayers in 2004 with ‘Frequently asked questions for the self-employed’. One question was; ‘I sometimes carry out work for my business at home. Can I claim part of my property running costs?’ HMRC’s response included the statement: ‘If part of the property used for business purposes is also used for some other purpose at the same time then no deduction is due.’ Some practitioners interpreted this to mean that no relief could be claimed for the business element of expenses of a room with mixed (business and private) use. However, BIM 47810 now clarifies this statement by saying: ‘Wholly and exclusively does mean that when part of the home is being used for the business then that is the sole use for that part at that time. Thus if the part of the home used for business purposes is also, at the same time, used for some other non-business purpose, no deduction is due (emphasis added). Thus a self-employed person working at the living room or kitchen table while other family members watch television or prepare food would not be eligible for a use of home deduction.

Apportioning or estimating?

A practical difficulty in quantifying use of home claims has generally been the reasonable apportionment of household expenses between business and private use. The practice of apportionment was approved in Caillebotte v Quinn [1975] 50 TC 222, where Templeman J said: “…it is possible to apportion the use and cost of a room on a time basis, and to allow the expense of the room during the hours in which it is exclusively used for business purposes…” An accurate apportionment would require knowledge of the household expenses attributable to the business area of the house, and the time period of business use for that particular area. However, HMRC state in the case of ‘minor business use’ that a ‘reasonable estimate’ will be made without detailed enquiry. This suggests that relatively small use of home claims will be acceptable without having to consider such apportionments. HMRC also indicate that enquiries are only likely if the amount claimed is significant and appears to be inconsistent with the nature of the taxpayer’s business.

No definition is given of ‘minor’ or ‘significant’, although this is perhaps unsurprising given the relative nature of those terms. However, HMRC indicate that a claim for £2 per week is ‘small’ in the context of a taxpayer writing up their records at home, and would not be queried (see Example 1 at BIM 47825). It is probably no coincidence that this is the same tax-free amount that employers can pay employees for the additional household expenses of working at home under homeworking arrangements (ITEPA 2003, s 316A).    

Fixed and running costs

A proportion of fixed and running costs can potentially be claimed if part of the home is set aside solely for business use for a specified period. The type of expenses subject to apportionment include the following, depending on the circumstances:

• council tax;
  
• mortgage interest;
  
• insurance (unless there is a separate business policy, in which case the full amount can be claimed);
  
• water rates;
  
• general repairs (e.g. decoration of the exterior, or roof repairs);
  
• rent;
  
• cleaning;
  
• heat and light;
  
• metered water (unless business use is charged separately, in which case only that part is allowed);  
  
• telephone (i.e. business calls, plus a proportion of the line rental based on the ratio of business to total use); and
  
• internet (i.e. including broadband, apportioned on the same basis used for telephone). 

The Business Income Manual guidance includes six examples involving use of home claims, which can be accessed via the HMRC website.

It is relatively well-established that if part of the home is used exclusively for business purposes, there is a potential restriction in capital gains tax main residence relief when the property is sold. As mentioned, a condition for claiming income tax relief for use of home is that there must be an exclusive element of business use. However, for a restriction in CGT main residence relief to apply part of the property must be used exclusively for the purpose of the trade or business (TCGA 1992, s 224(1)). The business part must therefore be used as such 100 per cent of the time for the restriction to apply, or so it would seem. A restriction for exclusive business use for part of the time would therefore not appear to affect main residence relief.