Becoming self-employed means you get to take control of your working day. You can set your own hours, be your own boss and even, should you choose to do so, work from home. This is perfect if you find the nine-to-five office life dull and uninspired, or if you just find yourself more productive working from a home office!
The COVID-19 pandemic taught many industries that working from home can actually benefit businesses and be a practical solution for those who find it difficult to make their way to the office. In fact, according to data accumulated by Finder, two-thirds of employees claimed they were more productive when working from home.
Despite all the benefits, working from home comes with some challenges, too. Whilst you might be saving money by working from home – around £44.78 per week according to Finder – you might also experience some new costs!
Fortunately, depending on the work you do and where you might qualify, you could claim some expenses back – even if you’re working from home! Let’s say you needed to upgrade your broadband in order to work from home, or needed to buy a suitable desk to work from, you could be compensated for these purchases!
The downside to this? HMRC’s rules on the matter can be a little bit complicated, so we’ve broken them down in this article so you can see where you could be saving money!
Claiming Expenses When Working From Home
Using your home as an office can be the ideal set up. You can cut down on commuting and travel times, save money on fuel and you can work in your pyjamas! As well as this, if you’re using a room in your house as an office space to run your business, you might be able to claim some business expenses.
Like any other expense, you have to provide a reasonable amount of proof that you deserve to claim the costs back. For example, if your working from home then you would need to prove to HMRC that you’re regularly spending time using your home as an office – not just occasionally making a call or doing some admin.
These rules get a little bit more complicated based on whether you’re running your business as a limited company or you’re a sole trader.
So, let’s take a look at the differences and what you could claim!
What Expenses Can I Claim as a Sole Trader When Working From Home?
Setting your business up as a sole trader means you run your own business as an individual, not as part of a legally separate entity, and as such keep all your business’ profits (once you’ve paid tax on them, of course!). Being a sole trader means HMRC’s rules for claiming expenses are a little different than that for a limited company – we’ll get to that later.
For sole traders, you have two choices when it comes to claiming expenses. You can either choose to claim simplified expenses, calculated at flat rates based on your hours of business use per month, or you can work out the costs by calculating the proportion of business hours to personal hours when using your home. For example, the amount of expenses you could claim for electricity bills depends on the proportional uses. You have to calculate what proportion of the bill might pertain to you working from home rather than being in an office. Keep in mind that you can also claim expenses on the proportional rate at which you use your telephone of broadband bandwidth.
The government website goes into greater detail on the simplified expenses you can claim, but you’d need to work a minimum of 25 hours from home per month. You could also check out the government’s simplified expense calculator to see if your business could be saving even more money by working from home!
What Expenses Can I Claim Through My Limited Company When Working From Home?
Like with sole traders, limited company’s also have two ways of determining how much you can claim as an expense when working from home. Again, like sole traders, one option is to use HMRC’s flat rate system. Alternatively, you can create a rental agreement between yourself and your limited company pertaining towards your home office. Let’s look at how each of these would work.
The HMRC Flat Rate
Claiming expenses using the HMRC’s Flat Rate system is probably the easier of the two methods. HMRC has a published allowance for the costs of running your business from home – you don’t need to provide specific receipts and evidence for these costs. This allowance means you can claim a flat rate of £6 per week, meaning the total amount you could claim for the 2020/2021 fiscal period would sum a total allowance of £312. You won’t have to pay any tax on this amount in your Self Assessment.
Creating a Rental Agreement
Creating a rental agreement with your limited company is one way to claim a higher amount than the HMRC flat rate entitlement. This involves leasing your personal workspace to your limited company and claiming it as an expense – much like you would for an office space.
To do this, the documentation must be official and formally agreed – you run the risk of paying tax on the rental amount if the agreement is not official. In this case, HMRC would treat your incoming rent as additional salary.
If you make the agreement official by drawing up a contract, your limited company can pay the rental amount using its pre-tax profits. This means the limited company wouldn’t need to pay any corporation tax on this amount.
If you choose to draw up a rental agreement, there are a couple of things you should probably keep in mind.
Firstly, the rental agreement must be official and signed on behalf of parties. Otherwise there could be a dispute about the legality of the agreement and you could miss out on additional expenses.
Secondly, the amount you choose to rent your personal workspace to your limited company for should be a realistic value. When you create a rental agreement with your limited company, you’re balancing your personal wealth against your limited company’s profitability. The wisest decision in these circumstances would be to charge a reasonable amount for the rent – that way you’re not damaging your company’s profits.
Finally, having an entire room solely dedicated to running or working for your business can be problematic when it comes to selling your house. Disputes can be raised over whether that room is a business space or part of the home – it’s a headache nobody needs!
It’s important for you to know that, like many other payments, the agreed-upon fee to cover the rental agreement should be reasonably proportionate to the ratio for which the space is used for business. Other items can also be included in these allowances, such as mortgage payments, council tax or, as with sole traders, utility payments.
What if I need help with my taxes?
You can Count on us! Our specialist tax services cover everything, from managing your corporation tax payments to filing your self-assessment. We started our business to deal with all the financial stuff so you don’t have to! That way, you can spend your time focusing on what really matters.