Looking at 2016/17 client has one-man-band company earning around £20k profits and not paying him anything.
He has employment income elsewhere of around £70k.
The Use of Home as office claim (modest office and modest use) is currently around £500 in the accounts (at this level just covering personal costs) but we're considering increasing to say £3,000 - which is a reasonable market rate on which the profit personally will be £2,500. The idea being that he pays personal tax of 40% = £1,000 but company saves additional corp tax of 20% £500 (not £3,000 x 20% because of course the company already "pays" Use of Home of £500). Therefore he takes home £1,500 + company retains £500. Effective tax rate of 20% rather than 32.5% on HR dividends.
However I think the eventual saving will be even less than 12.5% because the £500 retained will eventually need withdrawing from the company! Anyway, for now my questions are:
1. Does it need to be a market-rate rent or could he personally charge his company £10-£20k rent?
2. Will the measure to restrict finance costs of rented properties to BR tax relief effect my client personally being that:
a) The mortgage interest is a small proportion of the costs claimed in Use of Home as office
b) The measure does not affect individuals renting out commercial property - this being a residential property for commercial use?
I realise that these savings aren't great and he will consider retaining profits and looking at ER on future disposal, also making pension contributions from the company. But for now I'd like to check on these issues should we go down the route of extracting a little via Use of Home as Office. Thanks.
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market rent
If he charges more than a "market rent", then HMRC could claim that the rent is not wholly and exclusively for the purposes of the company's trade - so the client would get taxed on the rent but the company doesn't get the tax relief.
I believe the new rules (at the moment!) only apply to domestic lettings.
Need a proper license agreement
The company should have a proper license agreement to claim tax relief on "rent" paid to the director. Otherwise, it could be taxed as remuneration instead, especially if you describe it in the accounts as "use of home as office" which only applies to sole traders.
The most an employee (including a director) can claim without evidence that it is an extra cost due to working at home is £4 per week.
There should be invoices too (the rent should not go on an expense claim). Previously it was expedient to run with the tax year as rent is typically set at the most tax-efficient level, but with the new dividend tax coming in, it now makes sense to charge as much rent as you can get away with.
However, the rent should be no higher than the company would have had to pay to an unrelated landlord for similar facilities at the required number of days/hours per week. Also, the expenses claimed by the director on his tax return should be based on space used (or number of rooms), average hours and, for usage costs like broadband, gas and electricity, the % business use.
Note that it is not necessary with a license agreement for the expenses to be over and above what the director would have incurred anyway. That's only necessary for employees claiming expenses.
The new rules on loan interest are only for residential property, not offices.
Helpful responses
Thanks, both helpful responses. Esp cfield some very practical reminders. I'd have at least overlooked invoices from the individual. Ta