Employees who work from home
If you have to work from home some or all of the time, you are entitled to claim tax back on the expenses you have incurred.
Specifically, HMRC mentions business phone calls and the extra cost of heating and lighting your work area at home as examples of these expenses.
This is the case even if you haven’t even kept any records of these expenses and can’t prove you incurred them - but only up to a maximum of £156 for the 2011-2012 tax year (rising to £4 a week, or £208 a year, for the current tax year). You can claim more than that, but then you will need proof you incurred those costs from home working. Read the HMRC guidance on how to figure out how much you can claim from home working for more detail on calculating the portion of tax relief you are entitled to.
So what’s the catch? Unfortunately (and unfairly, in my opinion) employees can only claim for business expenses if they have to work from home, rather than working from home voluntarily or by choice.
For example, you can’t claim this relief if your employer offered you the choice of working from home and you took it, or if you persuaded your employer to allow you to work from home for any reason - but you can potentially claim it if your employer can’t accommodate you in the office or if the nature of your work requires you to live far away. Read more examples on the HMRC website.
The good news is regular voluntary homeworkers can ask their employers to pay them back for their home expenses free of tax and national insurance contributions. Again, from HMRC’s perspective, you don’t need to show proof of these expenses within the £4 a week limit (for the 2012-2013 tax year).
Self-employed home workers
If you’re self-employed, did you know that you can get tax relief on a portion of all your fixed household costs, such as Council Tax, mortgage interest, home insurance, general repairs, home maintenance and even your cleaner, as well as variable costs like water rates, phone line rental, broadband, heating and electricity?
The key thing you need to figure out is what proportion of the rooms or floorspace (whichever is more reasonable) you typically use for your business, and how much time you spend in that area, working. You can use this to figure out what percentage of your household costs you can claim tax relief on.
Apportioning home working expenses
Let’s say there are four rooms in your home (not including bathrooms, hallways and kitchens), each roughly the same size, and you use one of these rooms exclusively for your business. Since you use 25% of the space, you can claim tax relief on 25% of your household costs. However, you might then find you are liable for Capital Gains Tax on 25% of the gain you make when you come to sell the house.
Now let’s imagine the room you work in is also used as a guest bedroom occasionally. You would not then be liable for Capital Gains Tax. However, you also won’t be able to claim as much tax relief on your household costs. You’ll need to estimate the percentage of time the room is set aside by you for work vs. another purpose, as well as apportioning the floorspace you are using.
For example, let’s say you set aside a room in your equally-sized four-room property as an office and work at home full-time (40 hours a week), but for, say, two weeks a year the room is also used as a guest bedroom (an average of about two hours a week). You could reasonably divide your bills by a quarter to get the room’s expenses by floorspace, and then claim for 95% (40 out of 42 hours) of this sum. This works out to be 23.75% of the total household expenses.
Be aware that you may need to apportion your fixed costs differently from your variable costs, depending on the actual use and ‘identity’ of the room.
For example, let’s say you spend four hours a day working in the living room, and four hours in there in the evening watching TV with your family. If you don’t go stir crazy, you could claim as much as 50% (4/8) of the variable costs, because half the time the room is in use and incurring variable costs is due to your work. However, you could only claim a 16% (4/24) of the room’s portion of the fixed household costs, because the room is set aside as a living room and it is only used for business for a sixth of each 24-hour day.
Finally, you can claim 100% of your business phone calls, and should apportion the phone line rental by your need to make those calls (so if your business calls make up 75% of the total phone bill, claim for 75% of the line rental).
All these calculations should be viewed as guides - you should always only claim what you believe is a reasonable amount. There are more examples of calculations on the HMRC website, but I have checked all of the above examples with an HMRC self-assessment helpline technician.
If all that sounds too complicated and you only use your home in a minor way for business - for example, writing up business records once a week - then HMRC will accept a reasonable estimate of expenses of, say, £2 a week (£104 a year) without making detailed enquiries.
The deadline is looming
The January 31st deadline is looming, but there is still time to register for a self-assessment tax return for the 2011-2012 tax year (which ran from 6th April 2011 to 5th April 2012) so you that you can claim the tax relief you are owed for those 12 months. Just be aware that it takes seven days for the necessary documentation to arrive in the post, so you will need to get moving!
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