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Self-employed - apportion home as office costs

Hi

My client works from home 42 hours per week in a one bedroomed flat, and this is an 11 month accounting period. As he lives with his wife am I right in thinking he can only claim half the costs of living there as she lives there too? I have used the following calculation and would be very grateful for feedback on how strict I have been. It is based on 42 hours of work-time out of 168 hours in a week, less one month (as it's an 11 month accounting period) less 4 weeks (holiday), 2 people are living there and there are 2 "relevant" rooms (lounge and bedroom)

Calculation = 'the full bill' /2 rooms/2 people*(44/52 weeks)*(42/168 hours)

Thanks for any advice / feedback.

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W&E

So no room is used wholly and exclusively for business. Is the client SE'd and what isincluded in 'the full bill'.

Regards Peter

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When is is used wholly and exclusively

Does it make a difference if she goes out, shopping for instance??

Oh to live in your black and white world.

 

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No - it's a bedroom!

Hi

No - the office is the bedroom and he is self-employed as a freelance web designer. Am I being too picky with the 42 hours out of 168 potential hours? I thought that as the rest of the time the room is used as a bedroom this would be the fairest way to apportion it.

Thanks for reply - I await further instrucions!

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Full bill

Sorry forgot to answer the other bit - the full bill is (for example) the total electricity bill for the flat, the total water rates bill for the year etc

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The trick is in apportioning the costs.

Let's start from the basic premise that a deduction is allowable provided that there are times when part of the home is used solely for business purposes. So it is irrelevant whether or not your client shares the flat with his wife or the England football team. If he is incurring the expenditure then he may be entitled to a deduction.

Wholly and exclusively does not, in this context, mean that part of the home must be permanently used for business purposes. What is does mean is that when part of the home is used for business purposes, then that is the sole use for that part of the time.

The exercise then becomes one of apportioning the total cost incurred. It could be on an area and time basis - in your client's case, maybe 20% of the total area of the flat for 25% of the time. It could be on a consumption basis - eg for utility bills. Whatever method, or combination of measures, you choose for apportionment they should be reasonable and they should be recorded and thereby open to scrutiny by HMRC.

The types of expense that might be apportioned include rent, mortgage interest, council tax, insurance, repairs, cleaning, light and heat, telephone, water rates.

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HMRC manuals

I strongly urge you to read the HMRC manuals so you understand this better.  It even has worked examples.

http://www.hmrc.gov.uk/manuals/bimmanual/bim47820.htm

http://www.hmrc.gov.uk/manuals/bimmanual/bim47825.htm

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HMRC have more than one answer!

Hi

Yes I have read (and re-read!) the guidelines from HMRC and I am still unsure. In the first couple of examples HMRC recommed using % floor space as the basis for starting an apportionment calculation, then in Example 6 they recommed using the number of rooms "available" for use in the building. Various other posts on this topic (on Accounting Web) champion that excluding kitchen and bathroom is acceptable, (HMRC's site also say excluding the bathroom is fine but no mention of kitchen) which in my case leaves me with the lounge and the bedroom. Which is why I have split the bills by two.

I am a little clearer on the wife being involved though! My intention (now), therefore, is to split the cost of the bill (eg electric) between the 2 rooms and then allocate 42 hours of worktime / 168 hour week.

Including council tax, mortgage interest, electricity, gas, insurance, water rates and a 50/50 split on broadband and telephone the total "office" running costs come to £1,200 for the year. I feel this is acceptable but am always happy to hear any other comments.

Many thanks for the replies - there appear to be many posts on this forum regarding this issue and the common theme seems to be that HMRC have no 100% black and white rule.

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Seems a lot

Working backwards, it seems like your full costs for the flat are in the region of £10,000.  Seems a lot to me?

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Agreed!

Mortgage interest alone is £426.89 per month (poor bugger on 15% interest rate!), electric £1,400, Council tax £950, Water £500, Insurance £450 (increased premium after break-in) Internet £300 (web-designer so have allowed full cost) and replacement windows for the whole flat £2,500 (of which I have allowed £123.33). It seemed a long shot to allow anything for the windows but per HMRC guidelines (see example below) roof repairs or decoration of the outside of the building are allowable as long as they are apportioned on the same basis.

Example 5

The facts are as in example 4.
Chris has some work done on the house. She has the exterior painted and at the same time has the dining room re-decorated. What, if anything, can she claim as a deduction? The exterior painting is a general household cost. She can claim a proportion based on business use.

I should point out he is not a "kitchen table" worker - he is a full-time web designer so his home really is his office.

Thanks again for help and feedback.

 

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Wow, 15% interest.  That's outstanding.

Are you sure the windows are like-for-like replacement and not an improvement?

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Windows

Did some low-life break them all or have you replaced single-glazed with double-glazed? No matter, although an enhancement it's still a revenue item. See http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

-- Kind regards Andy

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Single glazed to double glazed.

Many, many thanks for the new thoughts (and worries!) and guidelines - no the windows weren't broken by low-life scallies - they were already leaky and rotting when he bought the property so he replaced them all. Am I right in thinking that this part of the apportionment (£123 being claimed out of £2332 total bill for windows) should really be classed as a capital allowance instead of revenue expenditure? In the HMRC example painting the outside of the house is an enhancement surely so I think I am ok to put part of his windows cost through? More comments please! I am learning such a lot today!

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Think you're okay

You can't claim capital allowances on the windows.  They are part of the building.  You could only claim as a repair.  I think you're okay, you just need to satisfy yourself that:

1) The repairs aren't linked to the purchase of the flat (see http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm and http://www.hmrc.gov.uk/manuals/bimmanual/bim35450.htm).  Basically you should be okay unless the purchase price of the flat was specifically reduced for the poor state of the windows, or if the buyer made an agreement to repair the windows when he bought the flat. 

2) That it is a genuine repair and not an improvement.  The fact that the windows are double glazed rather than single glazed is not considered an improvement by HMC (http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm).  However, without knowing more about the windows before and after the replacement, it's difficult to comment on whether there could be an improvement in any other respect (perhaps unlikely).

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Rates v Council Tax

Quote "I should point out he is not a "kitchen table" worker - he is a full-time web designer so his home really is his office."

Is he paying business rates?

 

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Business Rates n/a

There is no requirement to pay business rates for one office-type worker working from one room of a residential property.  There was a case on this a few years ago where a locsal authority tries & lost.

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Don't forget lightbulbs and window cleaning

If he is working all day with the lights on your client could probably claim a high proportion for new bulbs. There may also be service charges and ground rent he can add to his claim.

I would charge a higher proportion for gas and electricity as he is working there all day. Presumably he doesn't have the lights or heating on all night so he could base them on usage.

A good tip is to mention the basis on which you claim use of home as office in the "white space" on his tax return. This will hopefully avoid a discovery assessment if HMRC disagree with your figures after the enquiry window has closed. On-line tax returns do not accept the % sign for some reason so you have to enter pc. I don't think the taxman ever bothers to read these notes so not much chance of a query.

You could use the same method of apportionment for home offices rented to limited companies. Directors cannot claim "use of home office" like a sole trader can (only £3 a week allowed tax free provided you have an ongoing arrangement with your employer to work at home) and will get stung for tax on a P11D benefit if they claim for phone or broadband expenses on domestic contracts. The solution is to rent a serviced office to your company and claim a share of expenses against the rent on your personal tax return. Make sure you retain some domestic use of the room though so no CGT implications, and always best to have a license agreement rather than a tenancy to avoid possible stamp duty on the total value of the lease. Obviously make sure you charge a high enough rent to cover the expenses but no higher than the going rate.

Chris

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Home office - use common sense

 So HMRC in their guidelines say exclude the bathroom? So you only pee in private time not during business hours.

Its convoluted and the basic principle is, I believe, apportion but do not be silly or greedy. Without clear instructions HMRC would have some difficulty stating one method of apportionment is not acceptable but another is.

Light bulbs and the like is playing silly games and would probably rile HMRC.

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Silly lightbulbs?

Of course it's not silly to claim lightbulbs. Have you seen how much some of the new energy saving bulbs cost these days? If you've got the lights on all day because you're working from home, it's directly attributable to the business. You wouldn't actually itemise it as lightbulbs - it would fall under Maintenance which could also include window cleaning or office cleaning. Nobody would query that at all.

Comments like that are not only disparaging but mislead the original poster, so best not to make them. 

Chris

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Business Rates

You say that your client is self-employed rather than an employee working from home - my point above re business rates stand IMHO...

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bulbs

Energy saving bulbs are about 3 for £1...so the cost of claiming them [bookkeeper/acct wages] outweighs any small saving

 

 

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IMHO

Hi - sorry what is IHMO?

Thanks - and to everyone for all the posts - I am very grateful.

 

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IMHO

In My Honest (or Humble) Opinion

 

Ever heard of Google (or any other search engine for that matter)?

 

 

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IMHO

There appears to be nothing humble about you Jim.

Why would I go to a different search engine when I am already on this page? Perhaps you could access a search engine to determine the meaning of humble - it might distract you from adding bitchy, useless comments to this site.

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Oh dear, no need for a handbag fight. 

To be fair on Jim, it would have taken a lot less time for you to type "IMHO" into Google and observe immediate answer in the Google search results page, than it would be to submit your question on here and await the reply.  I'm sure he didn't mean to be aggressive in stating this.

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IMHO part 2

Hi,  it honestly was quicker just to type in the question and then carry on as normal - it wasn't a burning question for which I was desperate for the answer - just a question.

Asking if I am unaware of search engines was sarcastic and unecessary.

I am (mistakenly?) under the impression that this is an easy-going, helpful forum where it's ok to ask questions that you don't know the answers to, at least that has been my experience 99% of the time. I don't feel it is the intention of the hosts that people are nervous about posting questions on the off-chance a lofty regular subscriber feels the question deserves to be mocked.

Whe I asked what IMHO was I did not know - I thought maybe the HO part was Home Office so it seemed an acceptable question.

I would like to apologise to anyone reading this post for wasting their time thinking they would come away with more information about apportioning home office costs.

It just goes to show that not all posts on this site are helpful - Jim, this one's for you.

 

 

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Thank you

No further comment necessary... 

ETA (Edited To Add) 

I did use the "Honest" option but put the "Humble" option in brackets to show that it can mean other things too...

I still believe your "client" could have a problem running a business from home with business rates being charged if the local authority become aware of what he is doing.

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Not impossible..

But unlikely to have any business rates issue from the description. If he is a web designer, the chances are there are no structural alterations, no clients visiting, no staff, probably not advertising the business and the room is used for domestic purposes as well.

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1) water rates; 2) business rates

1) WATER RATES. It's a minor point I know, but I think that water rates won't normally form part of the use of home calculation. The HMRC guidance implies that water rates can only be apportioned on the basis of consumption. See the last couple of paras here: http://www.hmrc.gov.uk/manuals/bimmanual/bim47820.htm. Unlike gas and electric, most water consumption will be largely related to private use (washing up, showers, washing machine). For these reasons I just don't include water rates as there seems to be a weaker argument, and they are usually relatively small compared to the other costs.

2) BUSINESS RATES. I've never really got to the bottom of this other than to observe that in practice I know personally of no case where a one-man home business has had to pay them. Maybe it just doesn't come to the attention of the rating authorities. This page - http://www.voa.gov.uk/council_tax/examples_working_from_home.htm - on the Valuation Office Agency website gives the impresion that where they do become aware of it, most home businesses would be assesed to business rates.

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Thanks (again)

Thanks for the link to the VOA - most helpful. With regard to water rates I am inclined to accept your suggestion and remove them entirely - apart form a few cups of tea and the odd wee there is no water usage directly (and wholly and solely!) used for business purposes. It would be, both figuratively and literally, taking the p***. (!)

Many thanks to all who have posted.

 

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Business Rates

Many thanks to Red Leader for the VOA article. I for one had no idea they were getting so heavy about this. However, reading the guidance and the examples, I would still be inclined to think that most home businesses should be exempt. In the example of the solicitor, it stated that no domestic use was made of the room. As we all know, it is vital to maintain domestic use and this can easily be both achieved and proved provided the room is not adapted so much that domestic use is clearly neither feasible nor desirable, eg a dentists room. In the example of the converted garage, I think the key point here is that it was converted from a garage to be used for the business. I wonder what the outcome would be if it was converted to a playroom for the kids first and later used as an office. The VOA state that adaptations to a room are key factors, as are the contents of a room, but I think they would have to be quite fundamental before a room is caught for business rates. I doubt if a desk and filing cabinet would be sufficient to do so. They also state that a dedicated phone line is one of the factors they would consider, but on its own I wouldn't have thought it was a key one. On balance, I would say that most businesses run from home are exempt. They don't mention rent paid to your limited company as a factor though. As this is a common arrangement these days, this could be a big risk area and it would probably be wise to put a clause in the license confirming that the rooom is only available for certain hours of the day and that it leaves sufficient time for significant domestic use of the room, perhaps as a home office or games centre.

Chris

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Does anyone agree?

One of the answers here says "it is irrelevant whether or not your client shares the flat with his wife or the England football team." I don't think I agree with that because: a) if there is shared accommodation surely half the expenses will be incurred with a view to providing warmth  and shelter for the loved one (wife or football team); and b) if the costs are being paid from a joint account you would have to take that into account in the calculation as well.

 

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HMRC infer that the missus is immaterial!

 Hi - that was my concern too  (as can be seen from my original post) but below is a clip from the HMRC guidelines and good old Gordon appears to be allowed to apportion the complete bill regardless of who else lives in the house. (Unless it's a broken home and the kids are just visiting etc etc :-)

 

Example 6

Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours. 

The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening. 

After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480). 

 

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