It’s common for small companies to operate from home, especially during the start-up stage. Even for those that are more established with several teams and an office, remote and flexible working is a Covid-led trend that is here to stay.
So, whether you or your employees work from home on a full-time or part-time basis, there are several allowable expenses that your limited company could be entitled to. This is important, as not only can it help reduce your corporation tax bill, but it can also increase your income and leave you with more money to put back into growing your business.
In this post, we’ll explain the 3 types of expenses that limited companies can claim: HMRC flat-rate allowance, additional household costs, and rental costs via a commercial agreement. We’ll also let you know how to claim these working from home expenses.
1. HMRC flat-rate allowance
Whether you work from home occasionally or all the time, you could claim tax relief at a flat rate. This is a pre-allocated amount by HMRC and is capped at £6 a week (£26 a month or £312 a year) for the 2024/25 tax year.
You can claim the flat-rate allowance for business duties such as phone calls and utility costs for your work area. However, you can’t claim costs that are a mixture of private and business-related, such as rent/mortgage or broadband fees.
The main benefit of this allowance is that there’s no need to provide receipts or any other proof of expense, saving you plenty of valuable time. However, the one rule that you must abide by is that the claims are made “wholly and exclusively” for your limited company.
Generally speaking, the flat rate is enough to cover heating and electricity, but if you work from home often or require additional business equipment, £6 a week is unlikely to be sufficient. In this case, you should claim additional household expenses.
2. Additional household expenses
If your business outgoings are higher than the above caps, you can claim back your actual homeworking costs. However, you will need to make accurate calculations and provide evidence of the expenditure.
According to HMRC, you can make an additional expense claim for:
- Equipment, services, or supplies you provide to employees who work from home (e.g. computers, office furniture, internet access, pens and paper)
- Additional household expenses, such as gas or electricity for employees who need to work from home
However, you cannot claim fixed costs such as council tax, rent, or mortgage interest. These are not classed as working from home expenses as you’d have to pay them regardless of where you work.
You also can’t normally claim dual-purpose expenses (which are used for both personal and professional purposes), such as internet or phone bills. The only exceptions are if the contracts are in your limited company’s name, or you can clearly demonstrate that any usage of these facilities was carried out entirely for the running of the business.
You should keep an accurate record of these expenses to support your claim, without which it could be rejected. Depending on the size of your team, how often you work from home, and the time period you’re claiming, the process can get quite lengthy. So, if you don’t already have one, you could consider hiring an accountant to help with the admin.
Claiming for multiple rooms
Depending on the nature of your business, you may use more than one room in your home to carry out your work. For example, if you run a consumer-facing business and you use one room as an office and another to fulfil orders.
In such instances, you should:
a. Determine how many rooms are in your home
This includes normal living spaces like bedrooms and living rooms and excludes bathrooms and hallways. Depending on how it is billed, your garden could also be classed as a room if you have an office space in it. If its utility bills are separate from your home, it is classed as a separate home with one room. If the bills are included in your main property bills, then it counts as an additional room.
b. Work out which rooms you use for work and how long for
For example, if you spend 8 hours a day in a bedroom and 4 of those are for work, that’s 50% work use for that room.
c. Split the gas and/or electricity bill evenly between the rooms.
For example, if you pay £200 a month for utilities and have 4 rooms in your house, that’s £50 per room.
d. Divide the utility cost per room by its percentage of work use.
Add the final figures for each room to find your total business usage.
3. Rental costs via a commercial agreement
If you run your business from home on a full-time basis, you could opt for the option to sign a commercial rental agreement between yourself and your limited company. This is a formal agreement that shows that you, the owner, rent a working space from yourself, allowing you to claim tax relief on the rental payments.
The agreement should be based on the market value of the property. It is advised that you seek professional advice from an estate agent to provide an accurate valuation. This will also help provide solid evidence of the expense when making a claim.
The next step is where the process can get complicated. Even though your limited company will claim back the rental cost, you (as the individual) will need to declare the rental income in your Self Assessment tax return. If you share ownership with someone else, the cost should be split based on each person’s share of the property.
What you need to know
If you choose to draw up a commercial rental agreement, you should bear in mind that:
- To use the property for business purposes, you may need formal permission from the landlord or mortgage provider
- The agreement must be based on the current rental value
- You should seek professional help when drawing up the contract
- Working from home may impact the property’s insurance policy, so this should be checked beforehand
Who can claim working from home expenses?
To be eligible for working from home tax relief, you must be self-employed or an employee of your limited company. According to HMRC, you can claim tax relief for working from home if:
- Your job requires you to live far away from the office, or
- The limited company does not have an office
You cannot claim tax relief if:
- You simply choose to work from home
- Your employment contract allows you to split your work time between home and the office
- You work from home due to Covid-19
- The limited company has an office, but you can’t go there (e.g. because it’s full)
How to claim
You can check if you’re eligible and submit a claim online. You will need your Government Gateway ID and password to do this. If you don’t have one, you can sign up in just a few minutes. Once you’ve submitted your claim, HMRC will evaluate it and issue tax relief through your tax code.
If you are claiming for previous tax years, you need to do this within 4 years of incurring the expense.
Conclusion
We hope this guide has helped you understand the several business expenses that limited companies are entitled to claim for working from home. If you claim additional household expenses, or choose to draw up a commercial rental agreement, remember to get professional help to make sure that your claim is correct and thorough.
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