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Guide to Paying Tax for Home Businesses

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Guide to Paying Tax for Home Businesses

If the nature of your business allows you to do so, you may find working from home has many benefits. Working from home can offer you a better work-life balance, saves money and eliminates the daily commute. HM Revenue & Customs acknowledges there are costs associated with working from home. HMRC allows a deduction against income from your tax return.

Before you decide to work from home you might need the permission of your mortgage provider or landlord. You may even need to inform your local planning office if you are planning to adapt your home specifically for the business, and your local council if your business activities impact on your neighbours. You will need to make your insurer aware and you might need to pay business rates.

There are different rules for the self-employed (sole traders and partnership), company directors and employees and once you have opted to work from home you should ensure you make an appropriate claim against your income and ultimately keep your tax bill down.

 

Self-Employed

Those who are self-employed effectively have two options.

The first is to use the simplified expenses (flat rate) method which HMRC introduced in 2013. This is based on the number of hours you work from home each month, which are wholly and exclusively for the purposes of your business. In order to qualify you must work more than 25 hours per month from home:

Hours of Business Flat Rate                   
Use per Month per Month
   
25-50     £10
51-100  £18
101+    £26

 

The calculation has to be done on a month by month basis and we would suggest keeping some sort of record just in case you are ever challenged by HMRC. For example, if you worked 120 hours per month for 8 months and 60 per month for 2 and then 20 for the remaining 2 months of the year your claim would be £244:

8 x £26 = £208

2 x £18 = £  36

The second option is to claim an amount based on the room or rooms used based on apportioning actual expenses incurred. You will need to keep evidence of the amounts paid against which you are apportioning costs. HMRC will accept ‘reasonable’ claims which will be influenced by the size of your office in relation to the rest of your house, the length of time you spend working and whether the room is used exclusively for business purposes. Click here for more guidance from HMRC

Beware that using a room exclusively for business purposes will not qualify for Capital Gains Tax private residence exemption. Using the office for business part of the time with it being available and used privately will preserve the exemption if and when you sell your home.

There is a simple expenses checker available from HMRC which you can find here

If you live where you work (rather than work where you live) for instance, if you run a guesthouse then the simplified expenses rule means that business can make an adjustment for private use. This is deducted from actual expenses to calculate the amount deductible as a business expense. The flat rate covers the non-business proportion of household goods and services, food and non-alcoholic drink, rent and utilities. As above the calculation is based on a by month by month basis at the following rates:

  • 1 occupant £350 per month
  • 2 occupants £500 per month
  • 3 or more occupants £650 per month

For example of a family of 3, husband, wife and son running a bed and breakfast. For the year ended 31 October 2015 all 3 lived together until September when the son went on a round the world trip. The total expenditure for the year on food, utilities etc is £24,000. The private use adjustment using the simplified expenses method is £7,500, calculated as follows:

10 months with 3 occupants 10 x £650 = £6,500

2 months with 2 occupants 2 x £500 = £1,000

The allowable expenses to be claimed amount to £16,500 (£24,000 less £7,500)

 

Directors and Employees Working From Home

HMRC accept fixed rate payments to employees without the need for calculations and supporting evidence. Since April 2012, the rate has been £4 per week. For payments or claims over £4 per week, you will need to provide supporting documentation. If you work from home voluntarily and your employer doesn’t contribute you can’t claim tax relief on what you have spent.  

For more detailed information see here