March 18th 2015

Are you one of an increasing number of people who work from home?

The number of people working from home has risen to its highest level since records began -according to the Office for National Statistics. There were 4.2 million home workers in the UK in the first three months of 2014 amounting to 13.9% of the country’s workforce.

The figures include those who work at home and those who use their home as a base, but work in different places. About 1.5 million actually work in their home, or in studios or workshops in the grounds. Home workers are also likely to be well paid and highly skilled.

But according to the ONS figures, the majority of people working from home are self-employed. In all, 63% regarded themselves as self-employed compared with 34% who are employed by a company. With more self-employed people, there are more small entrepreneurs and small traders and for many people using e-commerce to sell products it really doesn’t matter where they are located.

There are clearly many good reasons for working from home but do you know how to maximise the tax efficiency of your home office and how much VAT, if any, you can recover?

Here’s some really good advice on both the Tax and VAT implications for you as a homeworker:

If you use part of your home for work, HMRC accepts that your company can compensate you tax and NI free. Using its approved allowance might seem the obvious way to do it, but is there an alternative that’s more tax efficient?

Working from home
In recent years HMRC has come to accept that it’s necessary for many people to work at home, both in and out of their normal day. It therefore allows employers to pay a tax and NI-free sum of up to £4 per week to cover additional home costs. £208 per year might be enough to cover your extra energy bills etc. but it isn’t much compensation for losing the use of a room in your home. Plus, it won’t cover the proportion of standing costs, such as council tax, relating to it.

Alternative solution
One suggestion, which we’ve championed in the past, is to rent your home workspace to your business. The usual advice is to charge a rent that corresponds to the business use of your energy bills, standing charges, mortgage interest etc. Because the rent and expenses match there’s nothing left on which you’ll have to pay tax. But the advantage over the £4 per week allowance is that you will have covered more of your costs.
The drawback with charging a rent intended to match your expenses is that it’s tricky to work out as domestic costs will always vary. A fixed rent would therefore be better.

Fixed rent
Receiving a fixed rent from your company seems like a good idea, but it too can have drawbacks. To the extent that the rent exceeds the deductible proportion of costs relating to your home workplace, it will be taxable. Plus, if the rent falls short of your costs you won’t be achieving maximum tax and NI efficiency.

Our advice is not to worry too much about balancing expenses and rent. Instead, set the rent according to what you would expect to pay for similar commercial accommodation (covering all bills, business rates, energy costs etc.) This can produce greater tax and NI savings.

Tax and NI savings
If, say, you agreed with your company that it would pay rent of £5,000 per year for use of a room in your house, and assuming the proportion of your annual costs relating to the room was £1,000, the difference of £4,000 would be taxable. But importantly, it won’t be liable to NI. That means compared to taking salary of £5,000 you and your company between you could save up to £1,290 per year. Even compared to taking a dividend there would be an annual tax advantage of £650.

An extra saving for joint owners?
There might be extra tax savings where you own your home jointly with a spouse or partner whose income is less than their annual personal tax-free allowance (£10,000 for 2014/15). Joint ownership means the rent received from your company must be shared between you, usually equally. Therefore, assuming rent of £5,000 per year and deductible expenses of £1,000, half the difference would be income for your spouse/partner. If they have no other income, whatever they receive will be tax free. That could boost the annual tax and NI saving to £2,090.

If you work from home and your office takes up 20% of the floor space of your house, then HMRC will allow you to reclaim 20% of the VAT on your utility bills such as gas and electricity.

Tip. The law says that your calculation of VAT claimable on mixed business and private use costs has to be fair and reasonable. So consider different ways you could claim a higher proportion; for example, floor area, number of rooms, time usage.

VAT on other additional costs
As well as day-to-day running costs your business may pay other legitimate business costs. This includes office furniture, redecoration, carpets and even display items such as pictures on the wall. As always, be sure to obtain a VAT invoice to support your claim in case you get a visit from HMRC.

Avoid paintings etc. that might increase in value, as you could end up out of pocket. That’s because you’ll usually have to pay the VAT on the increased value when you stop using the asset in your business.

Where’s the line?
Some costs are more obviously business related. If you have a separate business phone or broadband line at home, you can reclaim 100% of the related VAT. But if you have only one connection for both private and business use, you’ll have to make a fair and reasonable estimate of the VAT you can reclaim. For example, 90% of calls are private but are free; conversely, business calls are made at chargeable times and account for 50% of the bill. So you can reclaim 50% of the VAT.

You don’t have to limit your claim to these household costs. Perhaps you use a cleaning company which also spruces up your home office or your store files etc. at home and incur VAT on security costs, e.g. alarms? Put your thinking cap on and see what else you can reclaim.
To reclaim VAT on domestic costs they must be paid for by the business. Easy if you’re a sole trader or partner as HMRC accepts that you and the business are one and the same. But directors must make sure the bills are in the name of their company. They must also reimburse the company for private use to avoid tax and NI problems.

HMRC will accept claims made through the expenses system. So if you’re a director and the household bills are in your name, add a fair proportion of them to your monthly expenses claim even if the bill is not in the company’s name.

Extensions and conversions
With more and more people now choosing to work from home, the question of what can be done with the VAT on the conversion costs is becoming a common issue.

For example, a business may decide to build an extension or have a loft conversion to give sufficient office space. The office will contain the usual computers, desks, etc., and be decorated and furnished in line with the proposed use. In these circumstances the VAT on these costs can be reclaimed. If it’s through a limited company, get the invoices addressed to the business.

So it’s pretty good news. If you run your business from home you can reclaim the full VAT on the direct business costs and on a fair and reasonable proportion of mixed use costs.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.