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Mortgage interest & council tax in licence agreement?
Hi Nichola
Where you say "Rent and services for a licence agreement may also be calculated as if you were a sole trader", does this mean that an owner/director can charge a percentage of mortgage interest and council tax in the rental agreement where there is home office?
I came to your "Working from home" seminar but cannot find my notes anywhere, but think that this is what you said. Please can you confirm or refute this.
Thanks
Mortgage interest & council tax in licence agreement?
Hi Nichola
Where you say "Rent and services for a licence agreement may also be calculated as if you were a sole trader", does this mean that an owner/director can charge a percentage of mortgage interest and council tax in the rental agreement where there is home office?
I came to your "Working from home" seminar but cannot find my notes anywhere, but think that this is what you said.
Hi Michael
Well, no, as it happens. One declares the rent received less allowable expenses (i.e. all those you worked out when setting the rent), this may produce a profit - taxed as rental income, or may just break even, if you decided not to profit out of the deal. In this way the company ends up paying its share of your mortgage interest/rent.
Mortgage interest
From HMRC Business Income Manual:
BIM47820 - Specific deductions: use of home: specific expenses
Mortgage interest
If part of the home is used solely for business then an appropriate part of the mortgage interest is an allowable deduction. Repayments of capital are not allowable.
More detailed guidance on interest payments can be found at BIM45650 onwards
Example 2
Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade (CG64660). The room represents 5% of the floor area of the house.
His Council Tax, insurance and mortgage interest bills total £4500. He claims 5%, £225.
His electricity bill for heating & lighting is £300. He claims £15, which is 5% of the total.
His total claim is £240 (plus the business proportion of his phone bill).
Although Bill has apportioned his electricity bill by floor area rather than usage, the amount claimed is small and there is nothing to suggest that his business use is significantly greater or lesser than his private use. It can be accepted as a reasonable estimate.
Example 4
Chris is an author working from home. She uses her living room from 8am to 12am. During the evening, from 6pm until 10pm it is used by her family. The room used represents 10% of the area of the house.
The fixed costs including cleaning, insurance, Council Tax and mortgage interest, etc total £6600. A tenth of the fixed establishment costs is £660. For the purposes of fixed costs, one sixth (4/24) of the use by time is for business, so Chris claims £110.
She uses electricity for heating, lighting and to power her computer, which costs £1500 per annum. Chris considers an apportionment of these costs by time and area. A tenth of the costs are £150 and half of these costs by time (4/8) relate to business use, she claims £75.
She also uses the telephone to connect to the internet for research purposes. Her itemised telephone bill shows that a third of the calls made are business calls. She can claim the cost of those calls plus a third of the standing charge.
Sole traders
Steve,
The examples which you are citing are all for unincorporated businesses; the position for employees is very different. Note the title of this article.
Mortgage interest
Sorry you are confused, Mahmood. Read through this case:
Baird v. Williams [1999] STC 635 - employment duties required a clerk to the commissioners to maintain an office, but not to borrow money at interest to enable him to buy an office. The private benefit overrode the business need.
Mortgage interest may be claimed by sole traders or partners though.
The reason that there is a difference is that that expenses for the self employed come under s 34 ITTOIA 2005 which allows you to apportion expenses where you can identify part or an identifiable proportion of an expense. So if 1/5 of your house if used for work 1/5 of your mortgage interest should be claimable (subject to any adjustments for periods of use).
Mortgage interest deduction
Nicola, I came away from your workshop 'Working from home' thinking mortgage interest was tax deductible (pro-rated to the portion used for business)-not sure if the other participants had the same impression.
Can you kindly provide a reference to the case law which disallows mortgage interest if no new extension has been built. The law on this seems a bit weird. One person can buy a large house and locate his office in his new house and not be able to claim mortgage interest as a deduction where as another person buys a smaller house, builds an extension to carry out his business and claim mortgage interest as a deduction.