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October 2002
Q:
I have recently started a small business from a spare bedroom at
home. Can I claim tax relief on a proportion of my home running
costs, and if so, how do I work out the deduction? Are there any
points I have to watch out for?
A:
The statutory rule for claiming tax relief on business expenses
is that they are 'wholly and exclusively' incurred in connection
with the trade or profession.
Strictly speaking, an expense used for both business and private
purposes cannot be deducted, unless the business proportion of that
'mixed' expense can be separately identified. However, where claims
such as 'use of home as office' are concerned, the Inland Revenue
will normally allow an apportionment to be made between business
and personal expenditure, provided that the business element is
not excessive and has been calculated on a reasonable basis. So
avoid making 'round sum' claims, or otherwise beware the tax man!
Which expenditure?
A self-employed individual will incur household expenses when working
from home. The types of expenses which may need to be taken into
account include:
- Rent;
- Gas and electricity;
- Cleaning (e.g. window cleaning, domestic cleaners);
- Council tax;
- Home and contents insurance;
- Water rates;
- Repairs and maintenance to the house; and
- Business rates (if you are unlucky!)
Mortgage interest relief in respect of the business element could
also be taken into account in the 'use of home as office' claim.
In addition, repairs and decoration of the area used for business
purposes should be claimable in full.
Working out a claim
Assuming that your bills relate to the entire house how should
a claim be calculated? There is no 'standard' recognised method,
but a suggested way of working out the business element is as follows:
- Count the number of rooms in the house, excluding the hallway,
bathroom and toilet (unless customers visit your home regularly
and use those amenities);
- Establish the fraction or percentage of the house used for business
purposes (this could be calculated by reference to the number
of rooms, or for example by reference to the floor space used).
If only part of a room is used for business, use your best judgement
to make an apportionment;
- Make a list of all the relevant household expenses incurred
during the year or period in question (i.e. those with 'mixed'
business and private use) and add them together; and
- Apply the business fraction or percentage calculated in b) to
the total expenses in c) to give the business proportion of 'mixed'
household expenditure; and
- Add to the total in d) any expenses 'wholly and exclusively'
incurred for business purposes (e.g. repairs or maintenance to
a 'business area' of the house), to give the total use of home
as office claim.
Making the claim
A claim for use of home as office is made in the Self-employment
supplementary pages of the Self Assessment tax return (i.e. in box
3.52, for 2002 returns). It is also a good idea to explain in the
'Additional information' section of the Self-employment pages how
you arrived at the deduction claimed. This can reduce the chances
of the tax man making an 'enquiry' or 'discovery' in respect of
that claim later on.
Words of caution
If part of the home is used exclusively for business purposes,
when it is eventually sold the normal exemption from capital gains
tax on the disposal of a 'principal private residence' is subject
to potential restriction, and tax may be charged on the business
proportion of the gain. However, the gain on this business proportion
may be subject to a reduction for taper relief at the 'business
asset' rate (nb taper relief reduces chargeable gains according
to the length of time an asset has been held after 5 April 1998,
with more generous reductions for disposals of 'business assets'
than 'non-business assets').
A further problem is that there is a potential liability to business
rates. The Valuation Office Agency states the following on its website:
"There are many considerations that we must make in deciding
whether a room in a house used as an office should be liable to
business rates and each case is considered on its own merits.
We will consider the effect of the extent and frequency of the
non-domestic use of the room and any modifications made to the
property to accommodate that use."
It would therefore be wise to use household furniture (as opposed
to office furniture) for business use if possible, and to keep non-business
items (e.g. a television and an armchair, if that is not too tempting!)
in business areas.
Mark McLaughlin
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