Navigating the tax implications of working from home

28th June 2019

Working from home offers all kinds of benefits, from the opportunity to create the perfect environment in which you can be most productive, to the improvements to work-life balance that come with ditching the commute. There are advantages for businesses, too, assuming they trust their employees to work without direct supervision. For example, if only a portion of your workforce is on site on any given day, you might be able to run a smaller office, saving on rent and operating costs.

Running a business from your home isn’t without tax implications, however, and it’s worth considering capital gains tax compliance, business expenses and other issues before deciding to go down this route. The idea behind allowing self-employed people to deduct certain expenses from their turnover is that it gives a more accurate reflection of profits, and thus makes for a fairer tax bill.

What makes it tricky is working out what expenses count as allowable. The basic rule is that it covers any expense incurred ‘wholly, exclusively’ in the running of your business but working from home makes this distinction more difficult. For example, is your household electricity bill a legitimate business expense?

Some might decide to claim against the whole bill as it’s straightforward and easy but, of course, quite the wrong approach, and could get you in trouble. On the flipside, some people decide to keep it simpler again by claiming nothing, and thus miss out on a benefit to which they are fully entitled. The correct approach, accepted as a sound principle by HMRC, is to make a sensible estimate of the proportion of the bill that applies to your work, and how much is personal, and claim only against the former.

In general, as long as there is evidence that you have acted in good faith, the Revenue is quite tolerant of sensible guesswork. But do keep the records of your calculations in case they are queried later, along with all the original bills. The same principle applies to telephone bills, mobile phone contracts, and even gas and heating bills.

If you're self-employed as a sole trader and work from home for more than 25 hours a month, the process can be even less painful, thanks to an optional flat-rate system introduced by HMRC in 2013.

It allows you to sidestep some of the detailed calculations and make a claim based on the following thresholds:

Hours of business use per month

Flat rate per month

25 to 50

£10

From 50 to 100

£18

Above 100

£26

This only applies to utilities, though – not telephone bills, because they can more easily be itemised, or broadband, to name two examples of exceptions where separate claims can be made.

One thing to watch out for if you have a room in your house that you use only as an office is that it could reduce the amount of capital gains tax relief you can claim when you sell the property. That’s because this specific part of the property won’t qualify as a ‘private residence’ and so falls outside the bounds of that particular tax relief. In practice, few people who work from home have the luxury of a dedicated office – it usually doubles as the guest bedroom, makeshift gym, or storage space for all those boxes that never got unpacked after the last move.

You certainly shouldn’t let the complexities of working from home put you off, given the many advantages this approach offers. As with many areas of tax planning, it’s simply a matter of taking some time upfront to think through potential pitfalls and make considered arrangements, rather than operating on guesswork and assumptions. If you would like to discuss your circumstances in more detail, please contact us on 01926 422292.