Who knew your cosy living room corner could double as an office nook and also help reduce your tax bill?
The shift towards working from home has reshaped our daily routines and expenses. I’m willing to bet that your commute is a lot less stressful now you only have to walk down the hall! But did you know there are specific tax deductions tailored for home workers? Let’s dive into the essentials of what you can claim, ensuring you’re not paying a penny more than you should.
The basics of home office expenses
In today’s digital age, our living room might double up as a conference room, and the study could be where business strategies take shape. As our homes wear the hat of an office (at least part of the time), understanding the financial intricacies of this setup is really important.
Home office expenses refer to the additional costs you bear by using parts of your home for business purposes. This isn’t just about the direct costs, like buying a computer or office chair, but also indirect costs, such as the proportion of rent, mortgage interest, or utility bills attributable to your business use.
These expenses aren’t just numbers on a spreadsheet; they represent the real costs of running a business from home. By claiming these costs, you’re not gaming the system but rightfully adjusting your tax liability to reflect your actual expenses. It’s about recognising the financial impact of your business on your household and ensuring you’re not paying more tax than necessary. Knowing which expenses qualify, and how to calculate them, ensures you can claim back what’s rightly yours, reducing the strain on your wallet and helping your business thrive.
I’m a sole trader, what can I claim?
There are specific tax deductions for sole traders that you can take advantage of:
Proportional costs:
Your home is your castle—and sometimes your office. If you’re using specific rooms or areas primarily for your business, a portion of the rent or mortgage interest, utility bills, and insurance may be claimable. The method is straightforward: determine the fraction of your home’s rooms used for business and apply that ratio to your total costs.
You can find more information here.
Simplified Flat Rate:
If the idea of breaking down bills doesn’t appeal to you, there’s a simpler way. Sole traders can opt for a flat rate based on the hours they work from home each month, eliminating the need for intricate calculations.
I’m a limited company owner, what can I claim?
Here’s what you need to know about specific tax deductions for limited companies:
Rent Agreements:
Do you own the property you’re working from? If so, your company can technically pay you rent. But remember, a formal rental agreement should be in place, and the rent shouldn’t exceed market rates. It’s worth noting that this is likely to produce less than optimal results for the majority of taxpayers.
Equipment: Equipment purchased for business use can be claimed as a company asset, which can then be eligible for capital allowances or the Annual Investment Allowance.
Expenses most people can claim:
Whether you’re flying solo or running a limited company, some expenses are universally claimable.
Office Supplies:
That ergonomic chair you bought? Claimable. The stationery and computer software you’ve been purchasing? Those too.
Phone and Internet Costs:
Business calls and virtual meetings have become our new normal. A portion of these bills, directly linked to your business operations, can be deducted.
Mortgage Interest:
While the chunk of your mortgage isn’t claimable, a slice of the interest is. This can result in substantial savings over time.
Bills & Utilities:
Portions of utilities like gas, electricity, water can be claimed as business expenses.
Equipment:
From your trusty laptop to the coffee machine that fuels your day, equipment depreciation or outright purchases for business purposes can often be classified as allowable expenses.
What you need to do to claim
To make sure you have everything you need to claim your deductions, and there are no hiccups, remember to think about the following:
Detailed documentation: The cornerstone of any tax claim is evidence. It’s essential to have detailed receipts and records for all claims. If you don’t keep adequate records or complete returns incorrectly, you can incur penalties with HMRC. So, make sure your paperwork is both detailed and orderly.
Justifiable claims: Every claim should be wholly and exclusively for business purposes. It’s tempting to push the envelope, but if the expense doesn’t fit this criterion, steer clear. A dinner out might seem like client entertainment but classifying it wrongly can be costly.
Avoid mixing personal and business: This can’t be stressed enough. Using a single bank account or credit card for both personal and business transactions can cause confusion and lead to mistakes. It’s wise to keep them separate to ensure clarity and ease when accounting or facing an audit.
Stay updated with HMRC guidelines: Tax laws and guidelines are in constant flux. For instance, the introduction of the Making Tax Digital initiative by HMRC radically changed the way many businesses report VAT. Always keep an eye out for updates to avoid any last-minute surprises.
Home office Use: If you’re claiming a portion of your home expenses as business expenses, ensure you have a clear understanding of how much of your home is used for business and how often. The tax courts are full of cases where a taxpayer has pushed the level of home use in their business, and it hasn’t stood up to scrutiny. Over-claiming can land you in hot water with HMRC.
Avoid late submissions: Filing your returns late or paying your taxes after the deadline can result in penalties. Set reminders, use software, or find a trusted accountant to ensure you’re always on time.
The value of professional insight
Speaking of finding a trusted accountant, navigating the maze of tax deductions can be confusing, especially with the shifting sands of HMRC’s guidelines. This is where a seasoned professional, like us at Red76Tax, can illuminate your path. We ensure you’re making the most of your deductions while staying firmly within compliance boundaries.