Self Assessment: New guidance issued on working from home. By Nichola Ross Martin

Council tax? If you claim this wont you be required to pay business rates>
Thsnk you
Pesha

Pat,

I think that the ruling, enforced by a recent case, is that business rates are not applicable if the use is esentially one person plus computer. Similarly planning permission is not a requirement if the use of a room as an office does not change the essential character of the house as a home.

An intersting article and thank you for bringing it to our attention, Nicola; in my case a little later than for some of you!.

My first thoughts were this is good news and I must review my own and clients' circumstances; my second thought was about CGT.

Currently, there is no loss of relief for PPR/OMR provided there is no exclusive business use. To part quote TCGA 1992 s 224(1) '... part of which is used exclusively for the purposes of a trade, business, ...'.

The changes to the income tax rules are effectively a change in emphasis and to realising that duality of purpose is an unreasonable bar from allowing a deduction for some things but not others. Added to that, there are presumably more self-employed people using part of their home for business purposes.

So, if for income tax purposes expenses can be apportioned even where there is duality of purpose, why couldn't the PPR relief be apportioned to only apply to the non business element. Is it possible to 'interpret' the above extract from s224(1) to mean that even though a room is used for personal use some of the time and the rest of the time it is used for business use, or even mixed use all of the time, then we might end up with the situation of having to apportion the gain on the basis that part or all of the time it has some business use.

I can see that HMRC may have given us something with one hand but then may take it back (and maybe more) with the other. It may need a change in s224(1) or a simply a case giving it a different interpretation.

One final point, has the VAT position changed? For VAT registered businesses, can the VAT element of the business portion of these 'newly deductible for income tax' expenses now be claimed?

Mine is useable on your average train/aeroplane seat...

Common sense/convention says that you normally do not count the loo, hallways or other small rooms, but I do a lot of reading in the bath, so decide each case on its merits!

When totting up rooms to apportion, I presume that a downstairs loo doesn't count as a "room" ? (No, one doesn't use a laptop there ...)

The guidance is alas for the self-employed, employees have different rules.

You are refering to home working s.316A ITEPA 2003 whereby you may be reimbursed £2 p/w by your employer for your expenses.
Otherwise employees have very different treatment - no deduction for rent/mortgage int/c'tax, but that does not mean that you cannot charge your company rent - you need to create a licence, and a non-exclusive one at that. NI efficient, but the rent will be income in the director's hands.

You can write a book about all these things (another big plug here) which is why I have created my tax guide on this topic!

Malcolm
Yes, it is totally mad. I showed it to my other half (who is struggling to do his accounts). He immediately deduced that he should be able to claim £2,500 ... or £104!

Anyway, it all proves that HMRC's manuals are not suitable for general consumption, and that you should take care following some of their guidance. A common sense and reasonable approach is all that is needed. Just think to yourself "what would a general commissioner think would be a reasonable deduction under the circumstances"?

Nichola, you may well be right about the process that resulted in these
similar examples. The phrase, "reflects the facts of the case" seems to be a shorthand used by the Revenue to refer not to an apportionment basis but to an assessment of the reasonableness of the claim considering the business involved.

I really think that the Revenue should be challenged to correct example 3. The example says that the room is hardly used for anything other than business use and the actual cost on an apportionment basis is calculated at £450. This is to be disregarded for the reasons I have previously discussed and then the example says that £104 is, "a reasonable estimate of the expense incurred". Surely either £450 or £104 are reasonable estimates, they cannot both be right.

Noboby seems to be interested in my challenge to the Revenue's example 3 where: "Bert recognises that this is far too much for what he actually does at home". Somehow the taxpayer is supposed to realise that the now clearly published rules on proportionality of home costs restrict him from a claim of £450 to the old, (measly), £104pa.

As an aside to my point about uncertainty, £450 could hardly be described as a large claim warranting a view being taken.

What sort of business does Bert run? Bit wierd that he needs a whole room set aside for a spot of weekly bookkeeping, maybe he has huge quantities of filing and records are stored there - seems a bit unlikely given the detail.
If I were Bert I might do some time apportionment, but it does depend on whether there is a storage factor. Bert's example seems strangely similar to Angela in example 1 - perhaps the orginal got edited and we have thus ended up with this duplication?

Hot tip for 2007:
A lot of people are going to spend a lot of time pondering this new guidance!

I think the information provided on the HMRC is now relatively clear and useful. The figures involved following the examples will not be large in most cases and probably will not be a lot different to what most are claiming already. It is good to have clear examples in this area, there is too much uncertainty in the tax system as a whole.

HMRC should be encouraged to provide clear guidance which people can follow. Tthe mortage interest claimable debate has gone on for years and at last it seems a common sense approach is to be taken. Also I suspect that many use of home claims are relatively low compared to the actual cost of renting an office.

Has HMRC now just woken up that alot more people are working from home and cannot afford office spaces like Tony Blair, members working at the treasury and personnels working in the plush environment at the Inland Revenue offices. I met an inspector from Croydon and she had said working from home is not allowed if one is to be self employed and has to have an office in an office block. She is still in the offices of the HMRC. Perhaps this will enlight her that there are a lot more people working from home.

Is this retrospective?

Stephen

Nice idea but I think you'll find this to be capital expenditure unless of course the resurfacing takes place whilst re-marking clients' parking spaces whereupon, I do believe, it then qualifies as a repair.

And also, tongue in cheek it may have been, but many self-employed blue collar workers do have sheds-cum-workshops with power etc. I have often toyed with the idea of building an office in the garden but the thought of disturbing the weeds on my journeys to and from the house has dissuaded me quite apart from the fact that I can't afford it. LOL

I would make certain that each room used for business has an element of private use, no matter how small.

For example, put in a cd player, tv or radio. Maybe store personal possessions in a cupboard or on shelves.

That way, no room is used exclusively for business purposes and will therefore attract the Private Residence Relief.

I would suggest that even doctors and dentists could do this, although in the latter instance, maybe something else instead of a radio or cd player as that could be part of the ambience, which won't attract capital allowances but might be considered to be part of the business. How about storing computer games? I don't know many dentists that would consider playing computer games to be part of their business. Just musing.

I am about to have my driveway resurfaced (as all the clients over the years have churned it up) and have a new shed built (for additional filing space) so I feel some useful apportionments coming on !!

I run my business from home- one room out of ten used as an office. CGT is the VERY last thing I worry about. It's likely to be 10? 20? years before it becomes an issue.
By then who cares?
I was going to say who gives a ....

Can anyone advise if the Inland Revenue will get upset if the Premises costs suddenly leap up as a result of these new "rules".
My claim could rise from £300 to £600 when I take mortgage interest and council tax into account.

Office is used for business purpose every day (and some nights!!) although not solely!!
Also store all files, paperwork etc in relation to business - several cupboards and shelves bursting at seams with it all!
10 rooms in house so claim 1/10.

If a taxpayer uses their home office for business purposes 99% of the time they would get the vast majority of costs tax deductible and avoid any CGT problems.

I'm sure most people spend half an hour per week on private websurfing?

Steve Coates
Coates Franklin Ltd

Thank you Nichola. This is a very useful article.

Mark,

I could not agree more.

My understanding has always been that:

- For income tax deductions from self-employment income a room has to be used for business purposes. The amount that can be offset is dependent on the reasonable apportionment of the fixed costs, based on proportionality of space and time used, (this seems to be exactly what HMRC are now saying, except for example 3 where they suggest the apportionment is too high for undefined reasons, presumably an arbitrary assumption that the cost must be reasonable for the level of income generated)

- For CGT OMR relief to be lost there must be NO non-business use; as you say, unlikely in most cases of offices in rooms in private houses.

The whole thrust of this revised interpretation is to accept apportionment of fixed costs, (at last the various doubters on AWeb must acept that mortgage interest & council tax can be claimed).

One quibble though - in example 3 there is a bald statement that Bert must restrict his claim as it is "far too much for what he actually does at home". Sorry, but the room is used almost wholly for business purposes so the fixed costs can be apportioned if the apportionment basis is reasonable.

It is good to see that there is some recognition that there are a lot of us - myself included - who are self employed - but had no real support when it came to how we generated this income - long hours working from home with effectively no financial compensation for all the expences that may be inccurred.

I have always approtioned out many of my clients costs - including standing charges on phones etc and have never had any issues - but clients are either nervous about the whole issue or the opposite - trying to claim the most obscure items - but all with one thing in common - providing late or vague estimates. Having examples certainly helps and like all costing methods - relating how the cost is incurred is the most suitable - ABC to those in the know - heat by meter readings, internet by time or interest by area.

Going forward I will be trying to get my clients to be a bit more pro-active about this issue - looking at their home office as a working premises and being more systamatic in tracking costs. Obviously CGT is an issue, but most of my clients share their working environment with family members or in one case with the washing machine and tumble-dryer!!! Not really the most ideal place to work - but it avoids the homework tantrums and PC game fights - in the hum of the washing - apparently you cant hear them!!!

Another shares her home office with husband - but he hates her breathing - so more often than not shes stuck with the kitchen table!!! But it generates income, which tax is declared on - so I do get annoyed when the HMRC are petty with the rules. Hopefully these new rules will encourage better practise by everyone.

An interesting article.

I have always made an apportion claim on the fixed costs, with the exception of the Mortgage Interest and Repairs & Maintance! Pehaps because these ended up being fairly small I have never had any problems. It'll be interesting to see what difference it makes.

The CGT implication may not be so bad. If we could claim business taper relief on the "business" portion of our homes - then CGT would not be much of a problem. Of coure if the business taper relief is changes/is not allowable then it would be another matter.

I would be very interested in others comments about the CGT implication.

I am sorry to come back to you so late in the day, and I hope that you are still listening.
I would not advocate trying to reinterpret CGT. Exclusive use is just that, and it might be a tad expensive to argue otherwise.
VAT - well, I feel the rules are quite OK as they stand, so I would not tend to try and change those either.

Other points? Well, my concern lies with the whole idea of trying to apportion the unapportionable. I actually do not agree with HMRC's ideas at all! In fact, I think I will write an article to explain why yet another rewrite (s. 34 ITTOIA) has left us in an even greater mess than we were ever in before.

Sorry!

I've come late to this discussion as well, so apologise if this point has been discussed elsewhere. I'm a little confused about the difference between examples 4 and 6.

In example 4, the room is used for business purposes for 4 hours a day and for non-business purposes for 4 hours. The manual tells us that one sixth (4/24) of the fixed costs can be reclaimed. This seems to be in line with previous HMRC practice that required apportionment of a mixed use area to be business use/24 rather than business use/total use.

In example 6, the room is dedicated to business use for 8 hours a day and used by the family for 2 hours a day. The manual tells us that 8/10 of fixed costs can be reclaimed (which I think most people would instinctively feel is fairer than the 4/24 in the previous example - when not being used, the room is equally available for either business or non-business use).

Presumably, although this is not made clear, the difference is that the room in example 4 is furnished as a living room, while the room in example 6 contains a workstation and office furniture and is also used for storage of architectural drawings. Surely the storage activity and choice of furniture mean that, following the logic of example 4, the apportionment would be 22/24 (ie, allowing all fixed costs except those relating to actual personal use)? If working on availability for exclusive business use compared to total time you'd get 8/24, and if working on actual business use against total time you'd get 4/24.

Can anyone fathom the logic HMRC are using in arriving at the 8/10 apportionment? When do you ignore the time for which the room is not actively being used, and when don't you?