Working From Home Expenses for Limited Companies
One of the advantages of running a business is the ability to claim expenses for items used solely for business purposes, such as laptops, printers, and other equipment. This also includes claiming some of the costs associated with using part of your home as a workspace.
Working from home instead of renting a separate office can significantly reduce costs for your company, saving on rent and other associated expenses.
However, claiming home-working expenses for a limited company works differently than it does for sole traders. As a limited company director, your business is a separate legal entity from you personally, unlike a sole trader where the business and individual are considered the same. Because of this, you can’t claim tax relief on fixed costs in the same way a sole trader can.
In this article, we’ll explore the specific expenses you can claim when running a limited company from home and how to go about it.
How do I calculate my working from home expenses?
If you’re a limited company, these are the main ways of working out your home office expenses:
- Using HMRC’s flat rate method (as an employee)
- Calculating the actual expenses of running your home office
Renting your home office to your limited company
Using flat rate ‘simplified’ expenses
Limited companies aren’t eligible to actually claim simplified ‘flat rate’ expenses; this method is reserved for sole traders or partnerships that don’t have a company as a partner.
However, an employee or company director can claim them from the company as a ‘reimbursement of expense‘, and the company then saves tax on it as an expense.
This is the easiest method!
You don’t need receipts to prove your expenses and you can claim £6 per week since the 2020/21 tax year, which is an allowance of £312 each year. This can be included as an allowable expense alongside anything else you’re claiming.
The other good news is that HMRC doesn’t treat this as a ‘benefit in kind’, which means you won’t have any tax to pay on the amount through your Self Assessment.
Who can claim tax relief:
- your job requires you to live far away from your office
- your employer does not have an office
Who cannot claim tax relief:
- You cannot claim tax relief if you choose to work from home. This includes if:
- employment contract lets you work from home some or all of the time
- you work from home because of coronavirus
- your employer has an office, but you cannot go there sometimes because it’s full
Calculating your actual working from home costs
Another option is to work out your actual costs, rather than using the flat rate method. If your actual expenses exceed the flat rate, then it’s usually more efficient to claim using this method instead – but you’ll need to show how you worked out these costs which makes it a little more complicated than simply applying the flat rate.
If you do want to work out the exact costs you incur by working from home, the expenses you can claim for include:
- Heating, light, and power expenses
- Calls made from your home telephone
- Insurance on equipment
- Broadband costs if the contract was put in place after you began to work from home
- A proportion of cleaning costs
- Additional rent charges you’ve incurred when running your business (not rent on your home you would’ve incurred anyway)
It’s worth noting you can’t claim working from home expenses if your limited company has an office already, or the work you do from home makes no money for the company (but you may be able to claim a working from home allowance for things like bookkeeping or emails).
Renting your home office to your business
If you’re running a limited company, you might be able to rent your personal workspace in your home to your limited company and claim that as an expense. So, as long as you run your business through your limited company, and follow the rules correctly, you may be able to claim more than £312 each year.
you’ll need to set up a rental agreement between you (as the homeowner) and your limited company. If you don’t have this formal agreement in place then you run the risk of HMRC classifying the rent you receive from your limited company as additional salary (from your limited company) which would be subject to tax and National Insurance.
When you prepare your rental agreement, you need to keep the following in mind:
- The amount of rent needs to be realistic in terms of commercial value and must be on an ‘arm’s length’ basis. This means that neither party should be disadvantaged by the agreement. So you cannot calculate an amount of rent designed to benefit you as the individual owning your home or to affect the profitability of your limited company
- You shouldn’t have a room solely dedicated to your business as it can have additional implications when you come to sell your house
- A formal rental agreement must be in place and signed on behalf of both parties
- You should consider periodic reviews of the amount of rent paid (for instance an annual review).
Any income you receive as an individual must be included on your personal tax return (Self Assessment) and any profit remaining after expenses will be subject to Income Tax at your normal rate, which may make this a less tax-efficient option for you personally.
Your rental agreement can be used to cover the proportional costs of the rented space. There is no definitive list of allowable expenses – what is allowable depends on the facts in each case. But you can include items such as mortgage payments, utilities and council tax based on the proportion of the property used for business purposes.
How to calculate your allowable rental expenses
When it comes to ensuring a reasonable amount of rent, you need to calculate how much space is used by your business. A practical way to do this is to calculate your monthly outgoings for expenses you are looking to claim, then divide that by the percentage of your rooms being used for business purposes (which should usually be one room).
For example, if you have a house with seven rooms, an office should take up one room, so you calculate the amount of rent based on 1/7th of the eligible expenses. If your office was in use on average seven hours a day you would then calculate 7/24th of the amount, and this is what you would include in the agreement as the rent amount.
However, if you decide to sell your property you may need to pay Capital Gains Tax which needs to be included on your Self Assessment. This is because the ‘business’ part of the sale will not qualify for Private Residence Tax Relief. This is due to your home no longer being fully exempt because an area is being used for business purposes. Capital Gains Tax is applied to any increase in the value of the office area that may have resulted from the company’s occupation of it.
This means that you need to think very carefully about whether a rental agreement is the right decision for you. If you decide to sell your house, you could face a Capital Gains Tax bill on the office part as this will not be covered by the Private Residence Relief.
The calculation for this can be complicated and the Capital Gains Tax liability could be reduced if the office is used by you for non-business use outside office hours. It’s likely you’ll need specialist advice to calculate the amount of Capital Gains Tax you owe to ensure you follow HMRC’s rules.
Claiming for multiple rooms?
You’ll need to provide a very good reason for using more than one room for business purposes and evidence that the private use of this space is secondary to the business use. A legitimate situation might be a photography studio with an office and a dark room – remember that if you sell the property, Capital Gains Tax may be payable.
If you do use multiple rooms for business purposes then you should prepare a detailed calculation with supporting evidence. This should follow the process highlighted above. You may even go further and apportion expenses based on the square metres in use.
You may also claim back repairs on your property if they are directly related to, and necessary for, your business.
Keeping records
You’ll need to keep an accurate record of all your expenses in order to claim them unless you’re claiming for flat rate expenses to help with working from home costs.
If you’re a limited company, ensuring you have accurate up-to-date bookkeeping records is crucial – as well as a legal requirement!
20th October 2024