What expenses can I claim for working from home?
Income Tax – Self-employed
If a self-employed individual uses part of his home for business purposes it is likely that he will be able to claim a proportion of the household costs attributable to business matters.
Expenses that might be included in the claim are mortgage interest or rent, council tax, water rates, insurances, cleaning, repairs and broadband.
The actual calculation may be made on the basis of area, usage or time (or a mixture) depending on which is most appropriate in the circumstances.
Income Tax – Employees (including company directors)
For many years it was very difficult to obtain tax relief for an employee working from home. The general rule was that employees were only able to claim a tax deduction for expenses incurred “wholly, exclusively and necessarily in the performance of the duties”. This restriction made it practically impossible for employees to secure tax relief for any general household costs. Depending upon the employee’s duties it was sometimes possible to get relief for specific identifiable additional costs eg extra light and heat costs incurred whilst working at home.
The rules have since been relaxed to a certain extent and there is now an exemption from tax where an employer makes a payment to an employee in respect of reasonable additional household expenses which the employee incurs in carrying out duties at home under home working arrangements. Although the payment is in principal unlimited, payments of up to £4 per week may be made regardless of actual costs incurred.
If the employer pays more than £4 per week the exemption will only apply if it can be demonstrated what additional household expenses have been incurred.
Claims may be made in respect of the additional expenditure incurred on such items as light and heat and home telephone bills. No claim may be made for expenses that would have been incurred anyway on such items as mortgage interest or council tax.
Capital gains tax
Upon the sale of an individual’s principal private residence the gain is generally exempt from capital gains tax. However, the exemption is restricted if any part of the home is used exclusively for the purpose of a trade or business. The key word here is “exclusively”. The capital gains tax relief will not be compromised if that part of the house is used also for domestic purposes.
In addition to the taxation issues outlined above the following matters should be addressed:
- Working from home may give rise to a charge to business rates. Some Councils take a more relaxed view than others and advice should be sought from the Council concerned.
- Normal household insurance is unlikely to cover business equipment etc and the use of the home for business purposes may invalidate the existing cover entirely. Advice should be sought from the Insurers or from the Insurance Brokers.
- The terms of the mortgage deed may require lenders to be informed of the business use.