For many, a period of enforced working from home is now inevitable as we fight the coronavirus (Covid-19).
It won’t be everyone’s first consideration but there are tax implications in doing so.
Here’s what you need to know.
For a start, most employees should be able to claim tax relief for some of the bills they have to pay because they must work at home on a regular basis at the request of their employer.
These include things like a portion of lighting and heating costs, business-related telephone calls and so on.
However, it is important to note that an employee cannot claim any of this tax relief if they choose to work from home rather than being asked to do so by their employer.
Employers can pay employees up to £4 a week or £18 a month to cover additional costs if an employee must work from home and pleasingly, the employee does not have to keep any records to prove any of these costs.
The self-employed will have various running costs for their business, some of which can be deducted to work out their taxable profit.
Two options are available to do this.
Firstly, the “simplified” option for the self-employed, which means they can calculate their allowable expenses using a flat rate based on the hours worked from home each month.
This will be attractive for many because it means self-employed individuals will not have to work out the split between personal and business use. For example, how much lighting was needed for personal use as opposed to business use and so on. Telephone calls are the only exception to this simplicity – they will still need to be broken down, so the actual costs are accounted for.
This “simplified” option is only available to those working more than 25 hours a month from home and results in;
- a flat rate of £10 a month for between 25-50 hours worked
- a flat rate of £18 a month for between 51-100 hours worked
- a flat rate of £26 a month for 101 hours or more
I would suggest that most self employed adopt the simplified method due entirely to how easy it is to calculate.
For a few businesses however the simplified method has a downside in that you may not get as much tax relief as you would pursuing the more labour intensive second option available, that of calculating the actual running costs.
In calculating the actual running costs, HMRC states the self-employed must do this on a “fair and reasonable basis”.
HMRC suggest a reasonable way of doing this is to divide the costs by the number of rooms used or the amount of time spent working from home.
For example, a self-employed individual has 2 rooms in their home, one of which is used as an office. Their gas and electricity bill is £200. They can claim £100 as an allowable expense because this is £200 divided by the number of rooms. If they work 5 days a week from home, they could claim £71.42 (£200 divided by 7 = £14.29 x 5= £71.45).
Following this formula, the self-employed can similarly claim for the interest element of their mortgage payments (not the capital repayment), council tax, rent (if renting rather than owning their own home), utilities, telephone and broadband and even a percentage of any property repairs.
It’s more complicated but in some cases it may be worthwhile putting in the time to make the calculations. Remember that they need to be “fair and reasonable” and you need to be confident that if asked by HMRC you would be able to fully justify it with evidence of heat and light bills, mortgage interest certificates etc.