Maximizing Tax Benefits for Home-Based Work in the UK

Tax Implications of Working from Home

Whether you are an employee, self-employed, or a director of a limited company, working from home has likely impacted your expenses. While this setup offers convenience, it also raises questions about tax relief and potential pitfalls. Here’s a straightforward guide to help you understand the tax implications of working from home.

Claiming Home Office Costs

When you work from home, additional household costs like heating, electricity, and internet often arise. What you can claim depends on your employment status:

For Employees

If your employer requires you to work from home, you may be eligible for tax relief on these extra costs. There are two ways to calculate this:

1. Claim Actual Costs:

   • You can claim the exact additional costs for items like gas, electricity, water, and business phone calls.

   • Evidence, such as receipts or bills, is required to support your claim.

2. Flat-Rate Claim:

   • You can claim £6 per week without needing receipts.

Your employer can refund these costs tax-free. If they don’t, you can claim tax relief through your Self-Assessment or by completing a P87 form if you are on PAYE.

Important Note: Relief is only available if you must work from home due to business requirements or government rules. Voluntary home working doesn’t qualify.

For the Self-Employed

If you are self-employed, you can claim a portion of your household costs based on business use. There are two methods:

1. Actual Costs:

   • Calculate the business-use percentage of your home expenses, such as heating, electricity, and mortgage interest.

   • Keep detailed records and use a reasonable apportionment method.

2. Simplified Expenses (Flat Rate):

   • HMRC provides a flat-rate deduction based on hours worked:

     Hours Worked Per Month	Flat Rate (£/month)
     25 to 50	10
     51 to 100	18
     101 or more	26

In addition to the flat rate, you can claim a portion of your telephone and internet costs.

Provision of Office Equipment

Employees and employers often need to purchase office equipment for effective home working. The tax treatment varies depending on the circumstances:

If the Employer Purchases

• The business owns the equipment and can reclaim VAT and claim capital allowances.

• Provided private use is minimal, there is no taxable benefit for the employee.

• Watch out: If the employee keeps the equipment permanently, a taxable benefit will apply.

If the Employee Purchases and the Employer Reimburses

• Reimbursed expenses are treated as taxable earnings unless the employer requires the employee to transfer ownership to the company.

• VAT Warning: If the employee owns the asset, HMRC might not allow the business to reclaim VAT.

If the Employee Purchases Without Reimbursement

• Tax relief is rarely available as HMRC deems the expense necessary for employment but not incurred during duties. Employer reimbursement remains a better option.

Home and Garden Offices

With the rise of home offices, many people have converted garages or built garden offices. The tax implications depend on your business structure:

Sole Traders

• Construction costs generally do not qualify for tax relief since buildings don’t count as plant and machinery.

• Capital allowances may apply to integral features (e.g., lighting, electrical systems), but only for the business-use portion.

• CGT Warning: Exclusive business use of a home office can lead to Capital Gains Tax (CGT) on its sale.

Limited Company Directors

• Decide whether the office is a personal asset or a company asset:

  • Personal Asset:

    • Construction costs cannot be claimed, but you can rent the space to your company. This rental income must be reported on your Self-Assessment.

  • Company Asset:

    • The company can claim capital allowances and VAT on business-use portions.

    • Pitfalls: A taxable benefit-in-kind may arise if private use is unavoidable. Additionally, selling your home could lead to complications with principal private residence relief and repayments to the company.

Need Help Navigating Tax Rules?

Breaking the Mould Accounting Ltd specializes in helping businesses and individuals with tax planning and compliance. Get in touch with our expert team today to ensure you’re maximizing your tax relief while staying compliant. Contact us here.