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This is one of the most common questions we get asked by business owners from all walks of life. Working from home has its definite advantages – more freedom and flexibility, the ability to work in your own space and style, and a pretty significant cost reduction. But even so, there are still some expenses involved in running a business from your home. Things like running the heating for a full day when you might have left it off when you left for work, or the electricity it takes to power your work machines. But when it comes to splitting those costs with your business, it can get a little confusing. So today, we’re going to give you a walk-through of how you can claim some of the costs of working from home back, through the eyes of an IT contractor.
This IT contractor does a lot of work on site with his clients, installing hardware and training on software. But his business is based from home, where he uses a spare bedroom as an office and storage room for his equipment. In this space he does admin, organises his marketing efforts, communicates with clients and generally keeps the business running. Since he spends the majority of his time at home, he incurs some extra costs in the running of the house, and he wants to claim some of those back as business use. Now, there are 2 ways he can do that.
Option 1 – Simplified
Just like the name suggests, this is the simplest way to calculate what you claim back. All you need to do is add up the number of hours you spend working from home each month, and use HMRC’s ‘simplified expenses’ rates calculator for sole traders to figure out how much you can claim. This is a flat rate, so it’s pretty easy to calculate. However, it doesn’t include things like telephone or internet costs – you’d need to claim the business portion of those bills separately for that (don’t worry, we’ll explain that in a minute). Once you have your number of hours per month, just consult this table (taken from HMRC), and match up your monthly allowance.
Of course, trying to tot up how much time we spend working from home a month can be a bit of a challenge, so we suggest breaking it down into weekly amounts first. So in the case of our IT contractor – he knows that he spends an hour every morning, Monday to Friday, answering emails. He then spends 4 hours over Friday and Saturday planning for the next week. He spends around 3 hours Monday – Wednesday liaising with clients and prepping projects before he goes in site to install. There is then around 3 hours of catch up and admin from client visits as well. That adds up to 11 hours a week, or around 44 hours a month. In this model, he would fall into the second bracket and be able to claim £18 per month. Of course, in reality, you’re probably spending much more time than that working from home. The easiest option is to keep a note of the hours you work from home and note down the flat rate to use for each month. One thing to mention though, is that you can only claim a maximum of £312 per year under this model.
Option 2 – Proportion Of Costs
Alternatively, you can choose to calculate the proportion of your expenses you use for business and claim those costs on your business. To do that, you first need to work out what the actual running costs of your home are. If you own your home, this can include your mortgage interest, but not capital repayments, and if you rent, then it’s the rental charge. You will also need to include gas, electricity, insurance, service charges, cleaning and council tax.
Now it gets a little more complicated, because you need to work out how much of those costs is fair to allocate to business use. The simplest way to do this is take all the rooms in your house, minus bathrooms, kitchens and hallways, and work how what percentage of time you use each of those rooms for business. In some cases, it might be a split of numbers, while in others (say if you have a dedicated home office) it might be just one number. So, let’s say our IT consultant has an office in a spare room, that he uses 50% of the time for business. He has 5 rooms that qualify in the calculation, and the total cost of running his house is £15,000. By dividing this number by 5 (the number of rooms), you come to £3000 per room. He would be able to claim 50% of this amount – so around £1,500 a year.
Now, this might seem complicated, but once you know what the calculations are, it’s really rather simple. Using either of these methods will help you to reclaim some of the running costs of your home from the business, and help you become more efficient in both your business and personal finances. It also means you will be able to save money on your tax bill, as the use of home allowance is taken into account before it’s calculated. At Accountwise, we can help you understand what it is your right to claim, and what is the most tax efficient way for you to claim it. We work with a variety of self-employed professionals, (including this IT consultant), to help them make the most out of their business. If you’d like to find more, or have a chat about what else you might be entitles to claim, just get in touch with us today.