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October 2003
Q:
I sometimes carry out work for my business at home. Can I claim part of my property running costs?
A:
Believe it or not, this question was asked by none other than ... the taxman! It is apparently part of a 'frequently asked questions and answers' series that the Inland Revenue have been sending out to taxpayers with recent correspondence regarding 2003 tax returns, according to The Institute of Chartered Accountants in England and Wales (ICAEW) on its website.
Tax relief claims are often made by those self-employed individuals who work from home, for a proportion of the running costs of a property used partly for business purposes. This expense is normally described in the accounts as 'Use of home as office' or similar. However, the Revenue's official answer to the above question is (to me at least) both surprising and concerning:
Answer:
"That depends. If you set aside an identifiable part of your home and use it only for the business (for example a room used solely as an office) then a proportion of running costs can be claimed. These might include insurance, heat and light and mortgage interest. But you should note that if you have used part of your home exclusively as an office, there could be some loss of private residence relief from Capital Gains Tax when you sell your home."
"If no part of the property is exclusively used for the business then these costs are not allowable - even if there is business use."
The Revenue's answer will no doubt surprise many others. Indeed, the Tax Faculty of the ICAEW has already stated its view that the above statement is not strictly correct. The practice of most accountants and tax advisers in the past has been that a claim for use of home as office does not necessarily require exclusive use of a specific part of the home. Provided that the claim relates to the business proportion of property running costs, calculated or estimated on a reasonable basis, there seems no reason why the expense should not be allowable.
Tax relief claims
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 has, in the past, generally accepted an apportionment between business and personal expenditure, provided that the business element is not excessive and has been calculated on a reasonable basis (although problems can arise with 'round sum' claims (e.g. £5 per week), where no proper attempt has been made by the taxpayer to ascertain the business element).
If the Revenue do refuse claims for tax relief unless there is exclusive business use of a specific part of the home, many taxpayers will need to consider the implications carefully before proceeding to claim a deduction. As mentioned in Tax Doctor 1, when selling the home the normal capital gains tax exemption on the disposal of a 'principle private residence' will be subject to a potential restriction in respect of a proportion of any gain relating to exclusive business use. In addition, business rates could become payable in respect of the non-domestic use of an area of the house. The potential costs and benefits of a 'Use of home as office' claim may need to be compared.
Based on the increasing numbers of people working from home, it seems likely that the question of tax relief claims for business expenses will be receiving more attention and publicity in the future. Watch this space for further developments!
Mark McLaughlin
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