If you’re a sole trader, you will know about some of the expenses you can claim for against your tax bill. But how many don’t you know? Over the coming months we will share what you can claim and how much.
To kick us off – use of the home…
The Cost Of Working From Home
Running a small business from your home obviously saves you on the rent or purchase of premises and all the associated costs that go with it. But it does mean that your household expenses will go up. You’ll be using more electricity for lighting (especially in winter) and running a computer, plus there’s increased heating costs. And what about home insurance that you have probably increased because of the business assets in the property?
The good news is you can claim for these expenses – and there are two ways to do it.
Option One: HMRC Flat Rate
The first – and by far the easiest – way is to use the flat rate. It is straightforward and is unlikely to prompt any probing questions from HMRC, but it is the least cost-effective for you.
It is worked out on the number of hours of business use per month with the minimum being 25. For 25 to 50 hours you will be paid £10 a month; this goes up to £18 a month for 51 to 100 hours per month, with a further increase to £26 for 101 or more hours a month.
Bear in mind that this flat rate does not take into account any telephone or internet expense. You can claim the business proportion of these bills by working out how much you’ve actually paid for the company use.
Option Two: Manual Calculation
The second method of claiming is to use a manual calculation. So, the expenses you can claim for include:
- Mortgage interest or rent
- Electricity
- Water
- Internet
- Telephone
- Insurance
- Council tax
- Repairs
- Heating
Let’s say all the above costs you £5,000 each year. Now you need to count the number of rooms in your house that would be considered ‘living space’, so not the bathroom or kitchen. For example, you have a two-bedroom house and one lounge. Work out the number of days a week the home office is used and the number of hours per day.
And now the fun begins.
Divide the annual cost (£5,000) by the number of rooms (3) – 5,000/3 = 1,667
You use the office five days a week – 1,667/7 * 5 = 1,191
And you use it for eight hours a day – 1,191/120 (the number of hours in five days) * 40 (the number of hours you work each week) = 397
Don’t Fall Foul Of CGT
So, the total deductible expense for the year is £397, considerably more than if you opt for the flat rate, but it isn’t without its pitfalls.
If the room is solely used for business, it could attract capital gains tax when the property is sold, so although you are saving some tax year on year, the CGT that would be payable once the home is sold may outweigh the annual tax saving. The best advice would be to make sure the room has a dual purpose. Put a big flatscreen TV in there and use it as a family room from time to time.
Stuck? Speak To Our Team
If you are unsure on the best route to take, give Portfolio Holder Anna Fursland a call on 01438 727141.
