Do you use your Home as an Office? Here's the Lowdown on Claiming Tax Back

Of the UK’s 4.8 million self-employed workers, a good proportion use their home as their office at least some of the time.

After all, why would you not? Running your small business from your home cuts start up and running costs dramatically, removing one of the major barriers to setting up on your own.

While you can easily claim some of the costs involved as normal business expenses - business insurances, stationery and so on - you can also reclaim a proportion of the additional costs you incur, like heat and light, on your tax return.

Here’s our lowdown on how and what you can reclaim.

There are 2 methods you can use to claim tax back for using your Home as an Office.

Whichever method you use, it’s very important to keep hold of any bills and calculations in case you need to provide evidence to HMRC in the future. 

Remember that you can store documents electronically to save physical space, but they must be fully legible - check out our blog on setting up a simple system for your records for some suggestions.

Method One: Simplified Business Expenses

The giveaway’s in the name, but you are able to use simplified expenses to, well, simplify your claim by claiming a fixed amount based on how many hours in a month you work from home. It works along the same lines as simplified mileage.

Who can and can’t use Simplified Expenses for Working from Home Claims?

You can use simplified expenses if:

• you’re a sole trader
• you’re in a partnership and all the other partners are individuals
• you work more than 25 hours a month from home
• you’re not VAT registered

Limited Companies and LLPs can't use simplified expenses.

The pros? You just claim a fixed amount based on the number of hours you’ve worked from home in a month.

Obviously rates are subject to change but, as at October 2018, they are:

Click here to open the relevant page on the HMRC website.

Do you live in your business premises - perhaps you run a guesthouse, B&B or small care home? 

If so, your simplified flat rates are different - you can find out more here.

The cons? Your potential reclaim is usually quite small, and it doesn’t include your phone and internet costs so you’ll still need to calculate those separately.

Calculating Phone and Internet Use

Assuming you don’t have dedicated phone and internet lines for your business (which would be treated as simple business expenses), phone and internet costs are reclaimed based on actual business usage, not divided by the number of rooms in your house.

Basically, you can reclaim all charges relating to your business use of both lines, including a percentage of the line rental.

Method Two: The Actual Costs Method

The flat rate offered under the Simplified Expenses scheme isn’t the most generous, and you could find that you’re entitled to a larger claim using Actual Costs.

The Cons? One reason people prefer to claim simplified over actual expenses is that there is no fixed rule for what you can claim for actual costs. HMRC say you can claim “reasonable” expenses, but there can be a concern that what seems reasonable to you may not be viewed in the same way by HMRC themselves.

You also need to be aware that you could fall foul of CGT if you don’t use your workspace for personal reasons at least some of the time - if it was to be classed as a business space, then you would face extra taxes on selling your house.

Lastly, it simply takes longer to calculate. But if your potential reclaim is significantly larger, then it’s worth the extra time.

So, what can I claim for?

First, let’s look at some of the expenses you can reclaim. 

You can claim for some fixed and some running costs. You need to calculate your Phone and Broadband costs separately based on actual usage - see above. 

Fixed Costs include:

• Rent
• Mortgage interest paid (NOT the capital repayments)
• Council Tax
• Home Insurance (you can deduct the full cost of business insurance, if you hold this separately).
• Repairs, where the repair affects the room where you work*

* If the repair affects only the room where you work, then you could reclaim based on the percentage of time you use that room for work (bearing in mind you want to keep a dual-purpose for the room if you don’t want CGT to apply on sale of the house). If the repair affects the whole house, then you can reclaim a proportion using the room-based calculation outlined below. If the repair doesn’t affect the area where you work, then you can’t include it.

Running Costs include:

• Heat and Light

The Method for Calculating Actual Costs:

1. Work out how many rooms are in your house. Most Accountants would agree that kitchens, bathrooms and hallways don’t count for the purposes of these calculations, so let’s discount those.
2. Specify how many of those rooms you use for business. Make sure you only claim for the rooms you genuinely use. HMRC take a dim view of claims for multiple rooms unless there’s a good reason (like a photographer’s dark room and office). If you just tend to flit from one room to another, our recommendation is to claim for one room only.
3. Calculate your total expenses for the tax year.
4. Divide your total expenses by the number of rooms in your house to get an amount per room, then multiply by the number of rooms you use for business - this is answer A.
5. Work out the percentage of time you work. To do this, divide the number of hours you work in a year by the total number of hours in a year (8,760 in a normal year; 8,784 in a leap year) and multiply it by 100. This is answer B.
6. Multiply Answer A by Answer B.

Let’s look at an example:

You live in a 4 bedroom house with one living room, one study and one dining room (remember, your kitchen, bathrooms and hallways have been discounted) - that’s 7 rooms. You use your study for business.

Your total expenses (fixed and running costs) for the year are £21,000.

£21,000/7 rooms = £3,000 per room x 1 room = £3,000 (Answer A)

Let’s say you worked 160 hours a month for the whole tax year, equating to 1,920 hours. It’s a normal year, so:

1,920/8,760*100 = 22% (Answer B)

£3,000*22% = £660

So you could reclaim £660 for your use of Home as an Office, excluding your business phone and internet costs.

And if you’re the visual type and would like a handy infographic, here’s FreeAgent to the rescue with their “How do I calculate my working from home expenses” sheet.