Employees and the self-employed can claim certain reliefs
Employees and self-employed can claim certain reliefs when they work from home. This will depend on a number of conditions.
Employees working from home
It is a condition for tax relief under section 336 ITEPA 2003 that the expenses must be incurred ‘wholly and exclusively’ in the performance of the employee’s duties. In practice that means that tax relief can only be allowed for:
From 6 April 2012 HMRC has normally accepted that employees who satisfy the conditions for relief are entitled to a deduction of £4 per week (or £18 per month) for each week/month that they are required to work at home, without having to justify that figure.
Employees who wish to deduct more than £4 per week (or £18 per month) will be expected to keep records and to be able to show how their figure has been calculated.
The following expenses are not treated as allowable for employee tax purposes, because the employee will be required to make the payments whether or not they are working from home:
HMRC will usually accept that an employee is entitled to claim allowable expenses under section 336 ITEPA 2003 if all of the following conditions apply:
Self-employed working from home – simplified expenses
Self-employed can calculate their allowable expenses using a flat rate based on the number of hours they worked from home each month. This simplified method can only be used if the person works for 25 hours or more a month from home. The allowance is a flat rate based on the number of hours worked from home each month as follows:
Hours worked at home per month Flat rate allowed per month
25 to 50 hours £10
51 to 100 hours £18
101 hours or more £26
If the flat rate allowance is used, this is instead of taking the proportion of expenses relating to the home. Although even if the flat rate is used the self-employed person can also claim telephone and internet costs which relate to the business.
The flat rate allowance may vary throughout the year if the self-employed person works for different hours in his/her home from month to month.
For example a self-employed person may work from home for 20 hours per month for three months, for 30 hours per month for four months and for 55 hours per month for five months. The total flat rate allowances which can be claimed would be £0 x 3 plus £10 x 4 plus £18 x 5 being £130 in total for the year.
Simplified expenses (if living at your business premises)
Some self-employed people use the business premises as their home (eg a guest-house, bed and breakfast, care home etc.). There is a simplified method of determining the business expenses based on the number of people living in the household of the self-employed person.
The total costs of running the premises are determined then a flat rate is deducted for ‘personal use’ and the balance can be claimed as a business expense. The flat rate deduction is based on the following table:
Number of people in household Flat rate per month
1 £350
2 £500
3 or more £650
Example
Mr X is self-employed and his business is running a care home. He lives in the care home with his wife and son for 10 months of the year, and he lives in the care home for the other two months of the year without his wife and son.
The total costs of running the premises (such as light and heat, insurance, repairs, security etc.) for the year is £25,000. The personal use based on the flat rate system is £650 x 10 plus £350 x 2 which is £7,200 for the year. Therefore the business use which can be claimed by Mr X is £25,000 less £7,200 = £17,800.
General rule, apportioning the expenditure
The general tax rule is that an expense is only allowable as a deduction for self-employed purposes if it is incurred ‘wholly and exclusively for the purposes of the trade’.
Wholly and exclusively does not mean that:
Wholly and exclusively does mean that when part of the home is being used for the trade then that is the sole use for that part at that time.
In many cases there is more than one method of arriving at a reasonable apportionment, although some methods may be more appropriate for a particular type of expense. The following are some examples of expenditure and methods of apportioning those costs.
In general, fixed costs relating to the home can normally be apportioned based on area and time; these would include insurance, council tax, mortgage interest, rent, repairs and maintenance. Also consider:
Possible effect on CGT private residence relief
If part of the home (property or grounds) is used exclusively for the purposes of a trade or exclusively for the purposes of employment this would reduce the capital gains tax private residence exemption when the property is sold. The reduction in the private residence exemption would not be required if the part of the home which is mainly used for business purposes is also used for non-business purposes from time to time.
For example, an accountant may have an office at his/her home which is used for business purposes. The office has a telephone (either landline or a mobile device) and the accountant makes both business calls and non-business calls from the office. In this example it could be argued that the office is not used exclusively for business purposes and therefore there would be no need to reduce the private residence exemption for capital gains tax purposes.
HMRC has information on this subject in its manuals as follows:
Specific deductions: use of home: contents
Simplified expenses: use of home for business purposes
Simplified expenses: private use of business premises
Deductions: expenses other than travel: table of contents: expenses from F to Z