Do directors put their use of home income on their tax return?

Do directors put their use of home income on...

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I know this is a well written topic, but I have come across differing treatments, and would appreciate your comments.

When a sole company director charges the company for Use of Home, with schedule of costs, what do you show in his own self assessment?

I thought that it should be income for the director in his own S/A, but I have seen accountants treat it in different ways.  The previous accountant for one new client did not declare it, with the explanation that the income was matched by expenditure so did not need any entries.  Another accountant, with similar circumstances, declared £3500 of rental income on a self employment , and showed a small amount of allowable expenses, giving a taxable net profit.

What do you think?

Replies (11)

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By mikeyban
02nd Dec 2013 21:11

My theory is this £520 or less ..... Expense in accounts and no entry on SA return.

Above £520 needs to be shown as rental income and expenses to be claimed...

Correct treatment in all circumstances is second listing above but in reality I do not believe many accountants actually bother as the amounts are almost immaterial in terms of tax lost to HMRC .

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By tonycourt
02nd Dec 2013 21:31

Only one way....

....as far as I'm concerned. If a director charges their company for the use of land or buildings, i.e. their home, its rental income. It goes on the property pages of their return whether its £1 or £5,000. Relevant expenses are similarly reported.

I'm a little baffled as to why anyone would report it any other way.

 

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Teignmouth
By Paul Scholes
02nd Dec 2013 21:32

If there is any risk, then declare

Because there's usually an element of estimation & judgment we always disclose the rental income & expenses on the personal tax return.  The worst thing would be not to disclose then HMRC discovering the facts years later and challenging the amount of rental expenses claimed. In other words, even at £520 pa, if HMRC challenged several years, there could well be a material tax element.

Probably not necessary to say but don't forget to have a rental agreement in place.

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By mikeyban
02nd Dec 2013 22:09

Really guys?

£520 at 40% for 4 years is maximum £1000?

Obviously with expense claims to offset this we are talking about a minor sum......

There are ' bigger fish to fry' for an organisation with such few staff?

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Chris M
By mr. mischief
02nd Dec 2013 22:12

Summary of local approach around here

I have not seen this declared in any of the income tax returns of clients I have inherited from accountants, where a close company was involved and the rental of the home was in fact just "use of home office."

My own approach is to disclose this as "Use of own home" in the accounts - after all HMRC get to see every single line item via XBRLi - and to ensure that all such recharges are backed up by calculations as per the HMRC BIM for the self-employed:

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

I accept that technically this is for self-employed people and not directors, so technically such amounts can be challenged.  My view is that the risk is minimal, given that HMRC can hardly challenge the rental expenses being claimed as the calculation has been copied and pasted from the HMRC website.

I don't have any clients where such rentals amount to more than mere "use of home office".  If I did -for example rental of an outbuilding or similar for significant company activity - then I'd recommend formal rental agreements and so forth.

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Replying to DJKL:
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By mikeyban
02nd Dec 2013 22:31

Thank you

mr. mischief wrote:

I have not seen this declared in any of the income tax returns of clients I have inherited from accountants, where a close company was involved and the rental of the home was in fact just "use of home office."

My own approach is to disclose this as "Use of own home" in the accounts - after all HMRC get to see every single line item via XBRLi - and to ensure that all such recharges are backed up by calculations as per the HMRC BIM for the self-employed:

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

I accept that technically this is for self-employed people and not directors, so technically such amounts can be challenged.  My view is that the risk is minimal, given that HMRC can hardly challenge the rental expenses being claimed as the calculation has been copied and pasted from the HMRC website.

I don't have any clients where such rentals amount to more than mere "use of home office".  If I did -for example rental of an outbuilding or similar for significant company activity - then I'd recommend formal rental agreements and so forth.

Spot on and sensible and also mirrors what is going on in the reality.

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Replying to DJKL:
By JCresswellTax
03rd Dec 2013 09:43

Interesting

mr. mischief wrote:

I have not seen this declared in any of the income tax returns of clients I have inherited from accountants, where a close company was involved and the rental of the home was in fact just "use of home office."

My own approach is to disclose this as "Use of own home" in the accounts - after all HMRC get to see every single line item via XBRLi - and to ensure that all such recharges are backed up by calculations as per the HMRC BIM for the self-employed:

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

I accept that technically this is for self-employed people and not directors, so technically such amounts can be challenged.  My view is that the risk is minimal, given that HMRC can hardly challenge the rental expenses being claimed as the calculation has been copied and pasted from the HMRC website.

I don't have any clients where such rentals amount to more than mere "use of home office".  If I did -for example rental of an outbuilding or similar for significant company activity - then I'd recommend formal rental agreements and so forth.

So you use the BIM to calculate a use of home charge for a limited company?

Then put this through the accounts with the other side of the entry presumably going to the DLA? So creating tax-free cash for the director?

I think this is reasonable, but as pointed out above, in the event of a CT enquiry, I would be astonished if this wasn't queried by HMRC who will ask for the backup.  Strictly, as i'm sure you're aware, HMRC think £4 per week, or 'additional costs' is all that is allowed for an employee's use of home claim, unless a formal rental agreement is in place.  Why do you think they can 'hardly challenge it'? Its a completely different set of rules.  On that basis, do you allow employees to claim a proportion of their telephone line rental too?

Are you hoping you would just get a reasonable Inspector?

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By DMGbus
02nd Dec 2013 22:44

£4 per week tipping point

Given that HMRC recognise £4 per week as a standard allowable figure for an employee to be paid tax-free that is the "tipping point" that I use.

Above this level I prefer to see a rental statement drawn up and rent declared on the SA return.  Given that most small company directors have an amount of unused tax allowances

(ie. £ 9440 minus £9692 in 2013/14) then I don't worry if there's a profit shown on the rental statement, subject to the rental charge being at no higher than a commercial rate.

http://www.hmrc.gov.uk/incometax/relief-household.htm

 

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By DMGbus
04th Dec 2013 13:23

Employee / director

The £4 per week was specifically on an HMRC webpage regarding employees / employers (in the context of homeworkers).

Specific current EIM guidance is as follows:

http://www.hmrc.gov.uk/manuals/eimanual/EIM01476.htm

The £4 is not a maximum but rather a figure that HMRC feel comfortable with.

The advantage of a home rental agreement is that a proportion of the household overhead costs become allowable as a deduction from the rent received.   Overheads are not claimable as an employee, instead they are claimable on a rental account where they ARE allowable (subject to fair apportionment).

I would NOT use BIM guidance in this context as that clearly is for self-employed persons.

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Teignmouth
By Paul Scholes
04th Dec 2013 08:42

The risk is the client's not ours

It wasn't that long ago that AA received regular questions about using home rental agreements in preference to employee use of home claims and as the message has got through it seems this is now common practice.  But just because the bookkeeping is similar (Dr P&L Cr DLA) doesn't mean you can't cross the Ts & dot the Is.

From the company's point of view, it's paying a rental payment for the use of a property, which, on the face of it looks straight forward enough, but, as indicated above, given the landlord is the director, HMRC are perfectly entitled to challenge the quantum being claimed, whether we think that claim material or not.

The risk however is more on the director's side.  A £1K charge in the P&L may not be worth a challenge but how about in the director's tax return @ 40%?  I took over a case last year where both directors were putting through £3.5K as home rental, there was no home rental agreement and the accountant had never asked the directors to calculate a sum and had not included anything in their returns.

If HMRC query the of rental expenses in the personal tax return that offset the rental income, would the director be able to back it up with calculations using actual expenses and reasonable expenses? If not, would the inspector have the right to say that seeing as the rental agreement only allowed the recharge of costs, is the excess salary rather than rental? (P11D...NIC?).

This is bad enough but what about if you haven't even made HMRC aware of the rental income & expenses in the personal return?  I'm no expert but are such discoveries limited to 4 year's adjustment?

It's not hard to get this right and two numbers on the land & property pages (if only £520) is not going to be that difficult for most of us but, if you don't disclose, or don't make sure there's a rental agreement in place or don't ensure rental expenses are calculated have you explained the risk to the client?  It's their tax return, not yours.

Finally, has a related party transaction note been considered/made in the company accounts? The rentals were material in the case I inherited but the accountant had decided against disclosure (or more likely had been to lazy or daft not to consider it). 

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By pauljohnston
07th Jan 2014 14:04

BY making the director aware of how we

calculate the amount of "rent" by using HMRC recommended calculation method we as the Company Accountants show that it is not a guess.  HMRC would never go to tribunal because of the calculation which means that it would not challenge the figure.  Whilst I have sympathy with the £10 per week claculation I would feel exposed.

That does not mean I am  right and that £10 a month am wrong.  To me this is one of the great reasons why Accountingweb is so valuable to practioners and others (inc HMRC)

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