Home Office Tax Deductions

One of the most significant benefits you can avail of being a self-employed person is working from home. This new normal is especially suitable for those people who don’t prefer working in a 9 to 5 job role or having parents with disabilities or children at home to take care of.

But now after the coronavirus pandemic, work from home is a new normal even for a person working as an employee in a 9 to 5 job. In this blog, we will discuss: Who can claim a relief from home office expenses, rules for the home office to be considered tax-deductible, home office expenses you are allowed to write-off and the methods of calculating the use of home as an office tax deduction.

• Who is allowed to tax-deduct a room as a home office?
• Rules for the home office to be considered tax-deductible
• Home office expenses – What I am allowed to write off?
• How to calculate the use of home as an office tax deduction?

• Simplified business expenses
• Actual method

Who is allowed to tax-deduct a room as a home office?

HMRC doesn’t allow every professional to claim relief for a home office or work equipment’s to reduce their taxes. It mainly depends upon whether you’re employed or self-employed. As per the rules stated by HMRC, what can be tax deducted and what can’t vary for sole traders and limited companies?

Usually, only the self-employed individuals or limited companies will be able to claim back some of their home office expenses. In contrast, employees are only provided with this work from home option and able to claim back expenses for their home office at year-end, if it is mentioned explicitly in the terms and conditions of their employment contract. You’ll be considered as a self-employed person only if you are running a small business or working for yourself, which includes freelancing, providing professional services to end-user clients as an independent contractor, engaged as a business partner or working part-time yourself.

Also See: List Of Business Expenses You Can Claim As A Limited Company

Rules for the home office to be considered tax-deductible

If you are having a space equipped with a desk, it doesn’t mean that you will qualify for tax relief automatically. There are specific requirements which a professional need to meet to claim back expenses for working from home –

1. You must be using your home office as a Principal place of business. You may not be able to claim the expenses if you are rarely using it for some paperwork filling and mostly work away from your home office.
2. Make sure that you must use your home office regularly and solely for your business purpose. If you are using your dining table in mornings or evenings for conducting office work, it doesn’t mean that you are eligible for claiming a tax deduction. To qualify, you must have used this desk area exclusively for business work. If you are meeting your clients in a separate room regularly, it will be considered suitable as a write-off.
3. Separate structures, facilities related to storage and daycare can qualify for claiming tax relief only if you are using it for business purposes.

Home office expenses – What am I allowed to write-off?

To write-off home office cost, you must understand which types of expenses you can deduct from your taxes. There are two types of costs which you can deduct from your taxes –

1. Fixed cost

   - Rent, mortgage interest, Insurance (unless you have separate business insuranceto deduct the full cost), Council tax, Repairs and Maintenance.

2. Running costs

   - Heating, lighting and electricity, telephone, internet and mobile phone bills, water and sewerage, cleaning etc.

How to calculate the use of home as an office tax deduction?

There are two ways by which you can easily calculate the use of your home as an office tax deduction –

1. Simplified business expenses

   - It is an easy and straight forward method of calculating the use of home as an office tax deduction. In this method, you need to calculate how many hours you spend each week working from home and then use the applicable flat rate to make a deduction from your taxes. Make sure you must not include telephone, mobile and internet charges as it comes under running costs. These expenses should be calculated separately.

   Who can use simplified business expenses?

   You can use simplified business expenses in the following cases –

   1. If you’re a sole-trader
   2. If you’re engaged in a partnership and all the other partners are individuals.
   3. If you’re not a VAT registered dealer
   4. If you’re working from home for more than 25 hours monthly.
   Note– If your turnover is more than £85000 per year, you must register for VAT.

   HMRC rates for Home office

   HMRC current simplified business expenses rates are as follows –

   Hours of business use per month	Flat rate per month
   25 to 50	£10
   51 to 100	£18
   101 and up	£26

   How to Calculate Simplified business expenses?

   1. Calculate how many hours of work from home you have done each month.
   2. Use HMRC’s simplified expenses rates table to find the applicable flat-rate.
   3. Multiply your flat rate with the number of months you worked from home.
   4. Divide your bill by the number of working hours to calculate the business proportion of telephone and internet costs.

   Example - Suppose you worked for 120 hours a month for 9 months whereas, for the remaining 3 months (October, November and December), you only worked for 30 hours a month.

   Hours of business use per month is 120 hours for 9 months which falls in the category of 101 and up (as per the table specified above) for which the flat rate is £26. However, for October, November and December, it is 30 hours a month, which falls in the category of 25 to 50 for which the flat rate is £10.

   Hence, by way of simplified business expenses,the calculation will be (26 multiply by 9) + (10 multiply by 3) = you’d deduct £264

   In a year, you worked 120 hours per month for 9 months and 30 hours per month for 3 months, i.e. (120 multiply by 9) + (30 multiply by 3) = 1170 hours

   There are 8760 hours in a normal year (24 hours multiplied by 365). Then, you have to divide 1170 by 8760 and multiply it by 100 to ascertain the percentage of the deduction for your hourly broadband bill, i.e. 13%.

   If you are paying £30 per month in your phone and internet package, then the calculation will be (£30 multiply by 12)*13% = £47

   Also See: Limited Company Expenses You Can Claim When Working From Home

2. Actual method

   - The second method to calculate the use of home as an office tax deduction is an Actual method. The actual method is used to calculate the business proportion of your home running costs such as utility bills, cleaning etc. It is not an easy and a straight forward method like simplified business expenses and requires more efforts. There is no specified formula with HMRC to calculate home office costs. Therefore, to simplify it, you need to divide your business and private costs reasonably.
   

   The most common method used for calculating home office costs is to divide our total expenses by the number of rooms you have utilised for business use. You must keep all your expense records with yourself as it helps you in easily calculating your home office costs. HMRC may also ask you for the records to make sure that the claim you have made is accurate.

   How to calculate actual home office costs?

   1. Add all your yearly expenses starting from 6th April to 5th April of the next year.
   2. Divide your total expenses by the number of rooms you have utilised for business use. Kindly don’t include Kitchen, Bathrooms and Hallways.
   3. Divide the number of working hours by the total number of hours in the year and multiply it up by 100 to calculate the percentage of your business use.
   4. Multiply the result of step-2 with the percentage outcome in step-3.

   Example - Suppose you have worked 120 hours a month for 9 months and 30 hours a month for 3 months. You total yearly expenses (including both fixed and running costs) are £15000.

   To calculate home office tax deduction, firstly divide £15000 by the rooms you have utilised for business purposes. Suppose you have used 3 rooms, then your expenses will be £5000 per room (£15000/3).

   You’ve worked for 1170 hours, i.e. (120 multiply by 9) + (30 multiply by 3). Hence, the business proportion of expenses is 13% (1170/8760*100).

   The total amount of deduction from your taxes by using the home as an office = 13% of £5000, i.e. £650

“This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction”

In case you are having any query or want specialist advice on "Home office tax deductions", kindly call us on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

Also See: Will HMRC Accept Scanned Receipts for Business Expenses?

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.