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Use of home as office: Why put up with HMRC’s parsimony?

Shared from Tax Insider: Use of home as office: Why put up with HMRC’s parsimony?
By Lee Sharpe, September 2019

Use of home as office: Why put up with HMRC’s parsimony?

 

Lee Sharpe suggests businesses should stop tolerating HMRC’s miserly approach to claiming the costs of using the home for business.

 

It is pretty much a given that every year, household bills increase (gas, electricity, council tax, and the like); the upward trend is clear.

 

HMRC, looking always to be helpful, suggests in its ‘simplified expenses regime’ that claiming up to £26 a month for the business use of one’s home is straightforward (there are different amounts depending on the extent of hours worked from home; see Sarah Bradford’s article on claiming simplified expenses), and this is presumably why they’ve been loath to change the rates for so many years, lest people get confused by new, higher amounts. But the reality is that these figures were always set to the advantage of HM Treasury and thereby the detriment of the claimant and indexing them slightly for inflation is basically polishing a pig’s ear.

 

This article will look at what people in business should be claiming when using their homes for work. The rules work differently for employees, directors, etc.

 

Key principle

Fundamentally, an expense is allowable for income tax purposes only if incurred ‘wholly and exclusively’ for the purposes of the business. But that does not prevent a claim for an identifiable proportion of a larger expense that might have both business and private elements (ITTOIA 2005, s 34). When claiming 20% business use of one’s mobile telephone bills, one is basically saying that 20% represents the proportion of calls made primarily for business purposes over the taxable period.

 

Note that people often refer to claiming for the additional costs that relate to a business. This is misleading; just because there is no additional cost does not mean there is no claim. What matters is that you can identify a primarily business proportion. Note I said ‘primarily’ rather than ‘exclusively’; simply put, case law supports that a secondary private benefit is fine, so long as it was not the main purpose, but HMRC’s approach to ‘exclusivity’ can verge on the fanatical. Or fantastical.

 

Examples of claimable expenses

There are several domestic expenses for which a claim may be made, at least in part:

 

·         heat and light;

·         Council tax;

·         mortgage interest;

·         rent paid for the property;

·         household insurance;

·         cleaning;

·         repairs – generally to the property (business or office item repairs are usually fully deductible);

·         telephone and Internet.

How to decide the business proportion

For most such costs, the traditional way to apportion such expenses is by reference to the number of rooms in the house – ignoring bathrooms, hallways, pantries, and the like. In other words, counting only the number of usable rooms. This is simple, but HMRC has another trick up its sleeve, which is to restrict by reference to the duration of business use as well.

 

By strange coincidence, most of the examples in HMRC’s Business Income manual at BIM47825 result in a claim for just £102, or thereabouts. Thus does HMRC try to frame the issue around whether one should be claiming £2 of £3 a week, or risk something more substantive and incur HMRC’s righteous wrath?

 

Example 1: From HMRC’s manual

 

‘Bert runs a small business. He uses the spare bedroom at home as his office except for a week at Easter and a week at Christmas. All he does is to write up his records, once a week.

 

The house has 10 rooms. Bert calculates that his trade expense, based on 1/10 of the total costs would be £450. Bert recognises that this is far too much for what he actually does at home…[so he decides to claim £2 a week or £104 a year, instead…].

 

Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.’


What’s wrong with Bert?

I cannot work out why it is that Bert ‘recognises that this is far too much for what he actually does at home’. The spare room is his office and it appears to be given over to his business, except occasionally – it may have been a bedroom initially, but it will doubtless be used to store business paperwork, books, stationery, and other paraphernalia, and therefore it has a business function, even if it is not in active use all the time. Otherwise, HMRC would not have distinguished the private use at Easter and Christmas.


I have a printer at home, bought only because I have a home office. Broadly, it is used for a few minutes a day (very occasionally, my son prints pictures of dinosaurs). I do not, however, limit my costs claimed to x/1,440 because it is used for only x minutes out of the 1,440 minutes per day. If something has a predominantly business purpose, then a restriction – if any – should be made only to the extent that there be any meaningful private or other non-business use. 


Perhaps if Bert has no paperwork and runs all his business records on his ‘phone, and just uses the spare bedroom because it happens to be quiet, then HMRC would be in the right. Otherwise, HMRC is doing Bert and everyone else a huge disservice.

 

Example 2: From someone who doesn’t blindly follow HMRC’s mantra!

 

Jo is a consultant who works at clients’ offices but also from home. She has a three-bedroom apartment with a kitchen-diner and a living room, so five habitable rooms. The rooms are all roughly similar in size, so differences in floor area are moot.

 

She uses one of her bedrooms for her office and for storing business records and other business items – laptop, printer, stationery, etc., although it can still be used as a bedroom (and is, occasionally). Her expenses are as follows:

 

Expense                                           Annual          Proportion    Claim (£)             Notes

                                                             cost (£)          claimed

 

Mortgage Interest                        6,000             20%                 1,200                    Based on usable rooms

Council Tax                                      1,500              20%                   300                     Based on usable rooms

Insurance; general repairs         1,500              20%                   300                     Based on usable rooms

Heat and Light                                1,600              25%                   400                     Jo's family is out of the house for most of the working week, during which it is lit, etc., only when she works there, so a larger proportion is reasonable

Telephone                                      500                  10%                  50                         Jo's mobile costs are already put through the business and her landline is used only rarely for business purposes

Broadband                                      600                  75%                 450                        Jo needs the Internet for work, but private use is not insubstantial, so must be recognised

Total Claim                                                                                        2,700

 

Jo’s claim – which she has put effort in to justify – is roughly ten times what HMRC would like. But the key question is: is it part of a home that is used occasionally for work, or is it a room, etc., used primarily for business but sometimes also for domestic purposes?


Traps and pitfalls

(a) Water – unlike electricity, water is not often required specifically for business purposes. HMRC therefore tends to refuse a claim for water rates unless it is metered, and a proportion can be so identified.


(b) Capital gains tax and principal private residence relief – the CGT exemption for the main home is excluded to the extent that a part of the residence is used exclusively for other purposes. Good practice is, therefore, to ensure that any home office, etc., is used at least occasionally for domestic purposes – such as helping children with their homework or printing out dinosaur pictures. Handy things, kids (sometimes!). 


(c) Business Rates – not really a tax question but business rates are generally avoidable unless clients or employees regularly attend – care may be needed for scenarios such as hair salons, or art/crafts studios.


Conclusion

Here, I think the biggest trap of all is to fall into HMRC’s way of thinking – which I suspect has been cast deliberately, nudging the reader to treat business use of home as a triviality. In many cases, this is simply wrong and unfair. Substantial claims for the cost of using one’s home are, however, likely to be challenged by HMRC, so it is always better to consult with a suitably qualified professional, to check that the rationale is sufficiently robust.


Remember that the above does not apply to employees working for someone else or to company directors. But note that even then, the cost of providing office equipment for business purposes is allowable and often overlooked. 



Use of home as office: Why put up with HMRC’s parsimony?

 

Lee Sharpe suggests businesses should stop tolerating HMRC’s miserly approach to claiming the costs of using the home for business.

 

It is pretty much a given that every year, household bills increase (gas, electricity, council tax, and the like); the upward trend is clear.

... Shared from Tax Insider: Use of home as office: Why put up with HMRC’s parsimony?
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