What home office expenses can I claim as a limited company director?
Many small companies, especially during the startup phase, perform a lot of work from home. One of our most frequently asked questions by directors is what expenses can you legitimately claim back against your company?
If you’re a limited company, then there are three ways of working out your home office expenses – using HMRC’s flat rate amount, taking a proportion of allowable utility bills or creating a rental agreement between you and your limited company.
HMRC flat rate for limited companies
The easiest way to calculate your home office expenses is to use HMRC’s published allowance for the additional costs of running your business from home. You do not need receipts to prove your expenses and you can claim £4 per week, which is an allowance of £208 for the year. This can be included as an allowable expense alongside anything else you are claiming. HMRC doesn’t treat this as a benefit in kind which means you won’t have any additional tax to pay.
For HMRC guidance see EIM01476.
The benefits for claiming flat rate expenses are that no receipts are needed and as it’s a prescribed HMRC rate there is very little chance of challenge. On the downside it’s not a huge amount towards household expenses which could be substantial if you are working full time from a home office.
What can I claim for utilities and telephones?
As an alternative to the £4/week fixed rate expense, you can also get tax relief for a limited number of other expenses. They should not be for services already being provided for personal use, or those that have a clear dual purpose (such as a broadband line shared by the household as well as the business).
You are able to claim for the extra costs of lighting and heating the workplace, for example, as well as business phone calls and a dedicated business broadband service.
In order to establish the proportion of household costs used by the business, you will need to work out the percentage of your property which is used for business purposes, what proportion of a utility bill that can be apportioned to business use (e.g. lighting or heating) and for how long each day the service is used for solely business reasons (for example, the business area only needs to have heating for 50% of the day).
What about reclaiming the cost of rent, and mortgage interest?
Directors (and employees) can’t claim back any proportion of rent, mortgage interest, or council tax from their companies unless they have a formal rental agreement in place – as these costs would have been paid personally anyway. For further guidance see EIM32815.
Renting your home office to your business
In theory, limited company directors can charge the company ‘rent’ as a proportion of the rent or mortgage interest paid by the household. This rental income must be disclosed on your annual self-assessment form, and a formal contract would need to exist to cover this rental agreement.
Drawing up a rental agreement is beneficial because your company can deduct rental payments from your company’s pre-tax profit.
When you prepare your rental agreement, you need to keep the following in mind:
- The amount of rent needs to be at a commercial rate
- You should have a room dedicated to your business
- A formal rental agreement must be in place and signed on behalf of both parties
- You should consider periodic reviews of the amount of rent paid (for instance an annual review).
Your rental agreement can be used to cover the proportional costs of the rented space. There is no definitive list of allowable expenses – what is allowable depends on the facts in each case. You can include items such as mortgage payments, utilities and council tax based on the proportion of the property used for business purpose.
However, if you decide to sell your property you may need to pay capital gains tax on the disposal. The part of the home used for business would not qualify for private residence tax relief.
This means that you need to think very carefully about whether a rental agreement is the right decision for you. If you decide to sell your house, you could face a Capital Gains Tax bill on the office part as this will not be covered by the Private Residence Relief.
What are the different rules for limited companies & sole traders?
You should note that very different home office expenses rules apply for sole traders and directors (employees). Be careful when googling as this distinction can become blurred.