‘Home Office’ expenses
Many small business can carry out most of the accountancy work themselves, with the use of a spreadsheet or an accountancy package, whilst others choose to have an accountant for the full process. This choice will depend on your skills.
If you are completing accounts yourself, you should be aware that the HMRC allows the use of your own home as an expense in your accounts. There are two ways in which the HMRC allows business owners to calculate this amount:
- Flat rate, known as ‘simplified expenses’ for those who use their ‘home office’ for more than 25 hours per month
- Allocation and Apportionment Method for those who use a more significant part of their home to run their business.
- Flat rate
Refer to HMRC’s website for the current rates.
Extract: https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home (03/02/15)
- Allocation and Apportionment Method
These are split into Fixed and Running Costs of the home.
Fixed costs include council tax, mortgage interest, insurance, general repairs and rent. Basically, one way to find the business element is to add all the annual fixed costs (listed above) together and then find an appropriate way to apportion them for the business use. A common way in which to do this is to firstly ‘allocate’ by floor space i.e. divide the total of the fixed costs by the number of rooms in the house (excluding kitchens and bathrooms) and then ‘apportion’ this cost by the time used for business. For example, if the fixed costs of your house are £12,000 and you have seven available rooms, you would allocate this by the seven rooms. The one room, the study, is used for business purposes six hours out of a possible twenty-four hours :
e.g. £12,000 X 6/24 hours = £429.
Running costs represent costs that vary with the trade or personal use. These can include cleaning, lighting, heating, power, telephone, broadband. Where there is a significant use of the home as an office, a reasonable allocation method needs to be found. For cleaning, heating, lighting and power, you can use a similar allocation model as above i.e. add together and divide by floorspace. For the apportionment method, consideration can be given to the actual use of room e.g. the study may be used for business purposes for six hours during the day but in the evenings the children use the room to play on their computer for a further three hours. Therefore, running costs are apportioned over nine hours per day and a reasonable apportionment for the business costs could be 6/9. For example, if we go back to the above example of seven rooms and assume an annual cost for lighting, heating and power of £1500:
i.e. £1,500 X 6/9 hours = £143.
So far, given our example, we can allow ‘use of home’ as an expense in the accounts at £572 (£429+143). This is higher value than can be claimed under the ‘simplified’ method, above.
The telephone and broadband rental can be apportioned in a similar way as the running costs e.g. 40% of the itemised telephone calls are for business use therefore 40% of the line rental can be assumed is for business use.
Any further queries, please contact the HMRC or an accountant.
Note: information was taken from HMRC’s guidance BIM47820. For more examples see HMRC’s guidance BIM47825.