How To Reduce Your Tax Bill: Home Office Costs

How to Reduce Your Tax Bill

Home Office Costs

If you run a business from your home and have a home office, then some of the expenses you incur can be deducted from your income to reduce your tax bill.

This article looks at some of the types of expenditure that are usually allowable for sole trader businesses. It should not be seen as an exhaustive list. What is allowable depends on the facts in each case.

Expenses broadly fall into two categories, fixed costs and running costs.

Fixed costs

Some costs relate to the whole house and have to be paid even if there is no business use. These include costs such as insurance, council tax, mortgage interest, rent, general repairs and water rates.

Some particular points are considered below.

Insurance

If the business use is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed.

Otherwise, an appropriate part of the household premium can be allowed.

Council Tax

If business use is established the appropriate proportion of the tax may be allowed under the normal rules for the deduction of expenses.

Mortgage interest

If part of the home is used solely for business then an appropriate part of the mortgage interest is an allowable deduction. Repayments of capital are not allowable.

Rent

Part of the rent is an allowable expense when the home is rented and part is used solely for business purposes.

A sole trader cannot charge a separate rent to his or her own business. This is because individuals cannot rent property to themselves. The allowable expense is the proportion of the rent paid to the landlord that is properly attributable to the part of the home being used solely for business purposes.

Repairs and maintenance

A proportion of the cost of general household repairs and maintenance is allowable in line with the proportion that the house is used solely for the business. Examples include the general redecoration of the exterior or repairs to the roof.

Repairs that relate solely to part of the house that is not used for the business, such as decorating a room not used for the business, are not allowable.  Equally if a room is used solely for business purposes then the cost of redecorating that room is wholly allowable.

Water rates

If there is no business use of water then water rates is not an allowable deduction.

Running costs

There are some expenses where the total bill may vary with the amount of business use.  They include heat and light, telephone and metered water.

Where there is significant business use it is appropriate to apportion such expenses by reference to the facts of that usage.

Heat, light and power

A proportion of the heating and lighting costs of a room used at times solely for business purposes is allowable.  The proportion should reflect the facts of usage.  Where usage is minor, such as the occasional writing up of records, a reasonable estimate consistent with such minor use is acceptable.

You should take into account the number and nature of any power consuming items involved. A commercial photographer working from home using specialist studio lighting will have a much higher business expense for electricity than a trader writing up records once a week in the spare bedroom.

Telephone

The cost of business calls is allowable and also a proportion of the line rental (based on the ratio of business use to total use).  This proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure.

Care should be taken and a flexible approach adopted when considering the level of apportioned business expenditure, relating to all inclusive packages offered by telephone and broadband providers.

Broadband

Expenditure on an internet connection (including broadband and wireless broadband) is allowable to the extent that the connection is used for business purposes.  Where there is 'mixed' (business/non-business) use, follow the approach used for telephone rentals.

Metered water charges

In cases of heavy usage the business part of the property may be separately charged (and so fully allowable) in which event none of the domestic cost is deductible.

In the case of minor business use of the premises, such as writing up records, there is no business use of water and so none of the water charge is allowable.

Apportionment

The expenses detailed above should be apportioned on a reasonable basis, for instance, it is much more accurate if you can work out your exact electricity use, but this may be impractical to do so, in which case you need to work out a % use.

If you are working out a % use for light and heat, then it may be practical to use the same ratio for other costs, but, this depends on the type of user and the equipment used.

It will normally be appropriate to apportion the expenses on the basis of area or number of rooms (excluding bathrooms and kitchen).  In addition you need to work out the % business use of the office during an average week.

For Example:

Diane works from home as a graphic designer.  She uses one room in her house as her office.  There are a total of 7 rooms in the house including the room used as an office but excluding bathrooms and kitchen.  Diane calculates that she uses the room for business purposes 65% of the time on average.  The total of Diane’s household expenses (insurance, mortgage interest, council tax, gas and electricity) is £6,500. 

Therefore Diane claims home office costs of 1/7 x 65% x £6,500 = £604.

Diane also claims a proportion of her telephone/broadband expenditure based on her business usage.

Revenue Enquiries

The extent of business use is a question of fact.  Enquiries are only likely where the amount claimed is significant and appears to be inconsistent with the nature of the taxpayer’s business.  Therefore, although the deduction of home office costs from business profits is a legitimate tax mitigation exercise it should always be carried out on a reasonable basis and should be consistent with the nature of the business.

Other Business Costs

In addition to the household costs outlined already you are able to claim in full for all expenditure incurred in updating, maintaining or repairing computers, printers, fixtures and fittings, etc that are contained in the home office.  If there is any private use of such items then an appropriate percentage should be deducted.

Further Advice

As ever, it is always advisable to seek the guidance of a qualified and reputable accountant or tax adviser before completing your tax return.