Homing in on office costs

Claiming the expense hangs around the ‘wholly and exclusively’ rule, that says an expense:

- Incurred wholly and exclusively for business purposes

and

- Is not a capital cost

can be deducted as a business expense. (Section 34(1) Income Tax (Taxation of Other Income ) Act 2005)

The rule goes on to say that some expenses are ‘dual purpose’ - meaning an identifiable part is business and the rest is for some other purpose.

That identifiable part of your domestic running costs can be apportioned as a business expense and entered in to your rental accounts. (Section 34(2) Income Tax (Taxation of Other Income ) Act 2005)

You do not need separate bills for your business nor does part of your home have to be exclusively used for business.

When part of the home is used for the business, then no other use is allowed for that part of the home at that time, or the expense is not allowed.

To claim home business expenses, you need to show the tax man that there are times when part of your home is exclusively in use for business.

Apportioning expenditure

In the case Caillebotte v Quinn [1975] 50TC222, the courts approved apportioning household expenses for business.

Tax inspectors are told that in arriving at the proportion of allowed expenses, they need to establish the underlying facts.

They are also told that they should only launch an investigation when the expense amount is ‘significant’, which means in plain English, every landlord and property person can claim £3 a week or £156 a year ‘home office’ expenses without any comment from the tax man.

Factors affecting expenses

The factors taken in to account when apportioning an expense include:

- Area: What proportion in terms of area of the home is used for business purposes?

- Usage: How much of a metered or measurable supply is used?

- Time: how long is a room used for business compared to any other use?

Expenses broadly fall into two categories, fixed costs and running costs.

FIXED COSTS

Some costs relate to the whole house and have to be paid even if there is no business use.

These include Council Tax, mortgage interest, insurance, water rates, general repairs and rent.

If part of the home is set aside solely for business use for a specific period then part of these costs is allowed. Apportion these costs by area and time.

Insurance

If the business is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed.

Otherwise, apportion the household policy premium by area and time.

Council Tax

If part of your home is used for business, apportion by area and time

Mortgage interest

Again apportion by area and time for business use. Capital repayments are excluded from the calculation.

Rent

Apportion by area and time when the home is rented and part is used solely for business.

A sole trader cannot charge a separate rent to his or her own business. This is because individuals cannot rent property to themselves.

Repairs and maintenance

A proportion of the cost of general household repairs and maintenance is allowed in line with the proportion of the house used solely for the business.

Repairs that relate solely to part of the house that is not used for the business, such as decorating a room not used for the business, are not allowed.

Equally if a room is used solely for business purposes then the cost of redecorating that room is wholly allowed.

RUNNING COSTS

There are some expenses where the total bill may vary with the amount of business use.

They include cleaning, heat and light and metered water.
Where there is significant business use, apportion expenses.

Cleaning

Apportion to business use of the rooms.

Heat, light and power

A proportion of the heating and lighting costs of a room used at times solely for business purposes is allowed. The proportion should reflect the facts of usage.

Tax inspectors are told to take into account the number and nature of any power consuming items involved.

Telephone

The cost of business calls is allowed. together with a proportion of the line rental (based on the ratio of business use to total use).

This proportion should reflect all aspects of use, including incoming calls. In most cases, to itemised statements will provide a reasonable usage guide,

Broadband

Internet connection, including broadband and wireless broadband is allowed to the extent that the connection is used for business.

Where there is 'mixed' (business/non-business) use, follow the approach used for telephone rentals.

Metered water charges

In cases of heavy usage the business part of the property may be separately charged (and so fully allowed) in which event none of the domestic cost is deductible.

In the case of minor business use of the premises, such as writing up records, there is no business use of water and so none of the water charge is allowed.

Article Added Saturday, 17 May 2008

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