Is working from home right for your business?
Long commutes stuck in rush-hour traffic or packed in overcrowded train cars. Hiked-up business rates with eye-watering rent bills plus utilities and broadband payments on top. These are all completely understandable reasons why many new business owners choose to set up shop from their own homes.
Do you really need that separate office after all? You’ll save money by working from home and you can even claim money back from your tax bill.
Here, the Panthera team have set out everything you need to know about running your business from home.
Internet and telecoms
We’re sure that you don’t want your five-year-old accidently answering a call from an extremely important client. Watching Vonage’s advert will make any business owner working from home wince at the thought of it!
That’s why many home-workers see the value in adding a separate business-only phone line.
If you get a business-only line, then the cost of the line rental, linked broadband services, and any call charges can be deducted fully as business expenses. Just make sure you set up your additional line and broadband subscription under the company’s name, and that the company pays all of the direct debits for these accounts.
If you use your existing landline, you won’t be able to claim anything back on the line rental even if you only make one personal phone call a year. You can still claim back on any calls made for business purposes, but you’ll need to keep an itemised list of those calls in case HMRC want to see evidence. If your broadband is linked to your existing domestic-use landline, you’ll only be able to claim back a proportion of the bill linked to actual usage for business purposes.
Mobile phones are treated the same as your landline, so if you want to be able to claim all costs back, your business will have to sign the contract and pay all of the bills. It may be worth having one phone for personal use and one phone for business use or if your card has a dual-SIM facility, having both cards mounted within the one phone.
These costs can be a bit trickier to work out.
If you use your computer both for business and personally, you can claim the costs back. But, if you do, you’ll have to pay personal tax on the cost of the computer as it will be classed as a taxable benefit in kind.
When you buy a computer, laptop or tablet through your limited company and use it personally, your firm will also have to pay National Insurance Employers’ Contributions on the value of the purchase.
Panthera tip: All computer-related costs under £500 can usually go into the revenue column of your accounts. Anything costing £500 or over will need to go into your capital expenditure column to keep HMRC happy. But, you’ll be able to claim annual investment allowance for the value of the hardware or software if the amount you’ve spent on assets this year is less than £200,000 or you can include it in future tax years if you’ve spent £200,000 or over.
Running expenses and bills
When your home is your office, you may wonder how to separate the cost of running your household and a business.
If you have a mortgage on your home, whilst you won’t be able to claim back on any of the capital repayment, you can actually reclaim a proportion of the interest.
How does that work? When you took out the mortgage on your home, what you owe will have been charged through a system known as amortisation. So, at the start of your mortgage, you will have paid a higher rate of interest. As you pay off more of your mortgage over time, the percentage you pay in interest will decrease. You can see how this works here.
Say you have a £250,000 mortgage for 25 years at an interest rate of 5%. Your very first mortgage payment will cost £419.81 with £1,041.67 in interest. Your last payment will cost only £6.06 in interest, but the capital will be £1,445.41.
If you work from home, you can only claim back on the interest you pay. So you’ll benefit a lot more if you’re at the start of your mortgage than later on.
Alternatively, if you rent your home, you can claim back a proportion of the rent costs.
In either case, you can include council tax and household insurance in your expenses column and claim back a proportion of the costs.
Working out what’s deductible from your mortgage, rent and ongoing bills
Say you live in a house with seven rooms; a kitchen, living room, dining room, three bedrooms and a designated office space for working from home.
When working out what you can reclaim, you would divide your bills by seven. This is because only 1/7th of your home is primarily used for business purposes. The rest is considered residential.
Here’s how that would look.
|Bill||Original cost||Number of rooms||Deductible as expenses|
|Landline rental (shared with household)||£20||7||£0|
|Landline rental (separate second line)||£20||7||£2.86|
|Landline calls (shared with household)||All business-related calls||7||All business-related calls|
|Landline calls (separate second line)||All business-related calls||7||All business-related calls|
|Broadband (connected to single line)||%age of bill used for business||7||%age of bill used for business|
|Broadband (connected to business line)||£25||7||£3.57|
Only a few expenses can’t be claimed back 100%. The proportion you can claim back on other costs depends on two factors.
First, the number of room. In this example, your electricity would be shared with the household, so it would be reasonable to claim back 1/7th of the bill for the room used for business purposes.
Then, you would take into consideration the number of hours you spend doing work in your home office.
If you spend 40 hours a week or more doing ‘revenue-generating activity’ at home, in most cases HMRC will consider it reasonable for you to deduct the entire amount of the bill.
Anything less than 40 hours and HMRC will most likely expect you to pro-rata the amount you claim back. So if you claim back £100 of your mortgage interest from working from home 40 hours a week, you’ll have to halve that amount if you only work from home 20 hours a week.
If your business equipment and assets are stored at home, you may think your home insurance provides enough cover.
Many home-based entrepreneurs choose to take out business insurance to cover the loss, theft or damage of their business-related equipment and assets. Not only does this provide better financial protection, it’s another piece of evidence to show HMRC you work from home.
Business insurance does, however, have its drawbacks.
Let’s say you successfully claim back £1,000 in expenses from your home-related working this year and you’re a basic rate taxpayer, you won’t have to pay 20% tax on the £1,000. That means you’ll save a total of £200.
However, if your business insurance bill comes to £200 or more, the tax you’ve saved will be wiped out by the cost of your insurance.
The flat-rate scheme
Doing all of these calculations, to many, will seem overly complicated or involves just too much hassle. Another option you might consider is HMRC’s flat-rate scheme for those working from home - but it’s not the most generous scheme offered by the taxman.
Here’s what it looks like.
|Hours worked at home per month||Amount you can claim per month|
|0 to 24||£2|
|25 to 50||£10|
|51 to 100||£18|
|101 or more||£26|
Working from home
For a personalised estimate of how much you could claim back by working at home, call us on 01235 768 561 or email the team at firstname.lastname@example.org.