A lot of business owners and employees are currently working from home due to the Covid 19 pandemic and government advice.

In this blog, I have explained the expenses that you could claim to help you to reduce your tax on profit from your business or to enable you to claim tax refund as an employee.  

What is the Use of Home expense?

You can claim this expense for your business if you are trading from your home or claim as an employee because you are working from home.

There are different methods of claiming this expense, it is claimed differently by a sole trader, limited director or for an employee.

How to Claim use of home as an expense by a Director of a limited company working from home.

A director of a Limited company trading from his home is a legal entity different from the individual that owns the home itself.

So therefore, they are treated as separate entities under the law.

For this tax year, the director of a limited company can claim a flat rate of £312 per year. If he chooses the option of the flat rate, there won’t need to keep legal documents or records for using the home for business.

Another method is using the actual cost method. For the director to be able to use this method without facing the risk of being investigated by the HMRC in the future, he would need to make accurate calculations and keep records and documents as evidence.

The director would require a rental agreement between himself and the limited company.

How to claim the use of the home by a sole trader or an employee working from home.

The identity of the business and the individual are the same so there is no need for any formal documents.

They could also use either the Flat rate method or Actual cost method.

The flat rate for a self-employed is based on the number of hours worked from home per month.

When working from home and using the flat rate method, the following rates can be used:

25hrs to 50hrs =£10 per month.

51 to 100 hrs =£18 per month.

101 or more =£26 per month

You’d say it’s not a lot of money but however, £26 x 12 months is still something without having to keep any records apart from the number of hours they work in their home.

 They will just need to calculate and keep a record of how many hours they work from home.

Calculating the use of home using the actual cost method.

The second method you can use is the actual amount, the actual expense of running your home.

Now, this is a more complicated method because at this point the HRMC wants you to apportion the business part of the expense of running your home from your personal aspect of running your home.

The aim of this method to get the actual amount by dividing the expenses properly and apportioning the business part of the expense from the total expense. Now how is this calculated?

Step by step process in calculating the use of home as an expense.

The first thing to have in mind is to know that you need to apportion this expense on a fair and reasonable basis. How do you do this?

Step 1

You need to count the number of rooms in your house.

For example, let’s say a 3-bedroom house, you would count all rooms in the building including your kitchen, bathroom and your lounge because at times your kitchen might even be bigger than the rooms themselves.

Step 2

 So, after you’ve done Step 1 you need to ask yourself how often is the room used as an office. Does anyone else have access to use this room for other purposes?

Time usage of the room should be converted to a percentage for easy calculation, e.g. 50% or 100%.

Step 3

Then the next thing to do is to add up all your expenses in the house and that includes the interest part of your mortgage/rent, electricity, council tax, gas and property repairs that relate to the room used for business.

So, the expenses are added all together.

Calculation for actual cost of using home:

1/Total number of Rooms (Step1) x Percentage% (Step2 ) x Total Cost (Step3)

Illustration

James lives in a 5-bedroom house, the total number of rooms in his house is 10 (step1 is 1/10)

He has stated he uses the room 90% of the time for business – 90% (step 2).

The total cost of running his home yearly is £ 10,000 (step 3)

Therefore, his actual use of using his home for business is

1/10 x 90% x £10,000=£900 yearly

Conclusion on the use of home as an expense.

If you would like to claim this expense by yourself kindly click this blog that explains how to claim the use of home as an expense.