Working from home has long been on the rise in the UK, with many people seeking a flexible alternative to the standard 9-5 working day.
The outbreak of coronavirus has accelerated this, with thousands of businesses forced into operating solely from home to abide by social distancing measures and protect their employees.
While running a business from home is nothing new to many contractors, the Government has recently announced new and updated guidance on certain taxable expenses, largely to ensure those currently working from home are well informed.
Here, Joanne Harris, technical commercial manager at Nixon Williams, explains more.
What can I claim expenses for?
You’re able to claim tax relief on several items and services, providing they are crucial in enabling you to work from home.
In May, the Government announced a temporary tax and National Insurance exemption on the reimbursement of the cost of office equipment to allow employees to work from home. To be eligible, the expenditure must have occurred because of the need to work from home during the COVID-19 pandemic and would have been exempt from tax and national insurance had it been provided directly to the employee. Of course, contractors working through their own limited company have always been able to benefit from tax relief on these business costs.
This rule will be in force until the end of the tax year 2020/21. HMRC will not be collecting tax or National Insurance contributions due on any reimbursed payments from 16 March 2020, when it was advised that everyone should work from home where possible
Purchases can include office furniture, phone call costs, internet access, computer software and rent. However, all come with exceptions and rules determining whether you can claim and to what extent.
For the many contractors that have already been working from home before the coronavirus outbreak, this is unlikely to have any impact, however if you usually work on client site, now might be a good time to review your expenses and check that you are claiming for everything you can.
When purchasing items such as desks, filing cabinets and chairs, consider whether you will use any of these in a personal capacity first, as if personal usage is significant it may give rise to a benefit in kind charge and become a taxable benefit. If the personal use is insignificant, you may have to demonstrate this to HMRC.
If you are questioned on usage by HMRC, the time spent using an item for business purposes will be key. For example, if you only use some items intermittently, demonstrating them to be viable business expenses may prove difficult.
If you are making phone calls from your personal landline or mobile for business purposes only the incremental costs can be claimed back from the business. This means that no proportion of your line rental can be reclaimed, however the cost of individual itemised calls can be.
If a second line is installed solely for business calls, or you have a business mobile phone contract, the total cost of this can reclaimed as long as the line and all relevant bills are attributed to the business and paid from a business bank account.
Internet costs can be claimed if your records prove the connection is primarily for business use. Any personal use must be so insignificant that there is no possible distinction between work and personal connections. You must also have the contract in your business name and pay bills through a business bank account.
If you only have one internet connection at home, It is unlikely that HMRC would accept that personal use would be incidental.
Computer software and costs
Computer software is normally classed as an expense during the year it was purchased, but exceptions are made if the software is particularly significant and it will be used in the business over a number of years.
Computers purchased for work purposes should be paid for directly from the business bank account providing there is no significant personal usage – if there is, this could be deemed a benefit in kind and taxed accordingly.
If your business is claiming on the flat rate VAT scheme, the VAT can only be reclaimed if the total expenditure on a capital asset exceeds £2,000 on any single invoice.
The cost of computer equipment and other assets for use over a number of years will usually be capitalised for the purposes of your accounts and depreciated over the useful economic life of the asset. Your business will be entitled to Capital Allowances, which means a reduction in your corporation tax liability in the year of purchase.
Enhanced use of home as office
If you work in a rented property, you might be able to claim tax relief for part of the cost of rent as long as one part of the property is wholly used as an office for work. The amount you can claim will be calculated as the proportion of rent attributable to the space you in work in.
If you are completing the ‘fee earning’ work from home i.e. the work your client pays you to do and not just general administration of running a business, you will be able to submit an enhanced use of home as office claim. This means you can apportion your rent and household bills for the time you spend working from your home office and reimburse this cost to yourself from the business with no personal tax implications. As this will be a business expense, the cost of the claim will also reduce your corporation tax liability.
When claiming back some of the cost of working from home, there are two routes available to use; a flat rate claim or an enhanced use of home as office claim.
A flat rate claim is the easiest way based on HMRC’s allowances for the additional costs of working from home. You will not need receipts to prove expenditure and you can claim £6 per week, £26 per month or £312 per year.
This can be classed as claimable expenses alongside any other claims, as long as the annual amount doesn’t exceed £312.
If you’re contracting through a limited company and completing a significant amount of your fee earning work from home, you can reclaim a higher allowance than the annual flat rate claim by apportioning your household bills for the area that your office occupies in your home and the number of days in the month that space is used for business purposes.