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Use of home as office

Use of home as office

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My client is a contractor, working on two or three sites at a time in the North East and North West. This involves a lot of travelling and staying away from home for much of the week. He is usually only at home at weekends, although is often working Saturdays as well, so I usually can only see him Sunday evenings.

He has just had a PAYE inspection and the two main areas areas were sub-contractors and travelling. These were all accepted with no extra tax to pay and the only requirement was that each fuel receipt should have the name of the employee and vehicle reg written on each. They are all company owned commercial vehicles and no cars.

However, the one item they queried was the claim in the company accounts for "use of home as office", although this wasn't mentioned in their notice of the visit. They wanted to know how the figure in the 2014 accounts was calculated-£2,600 (£50 wk).

The claim in the first accounts was 55 wks to 30/9/10 £1,100 (£20 per week) then £23 per week for 2011 and 2012, rounded up to £1,200.                                     Turnover was £67k, £125k and £500k respectively.

In 2013 the turnover was £800k and 2014 £500k so we increased it to £2,400 (£46wk) and £2,600 (50wk) respectively.

The office is a spare bedroom, containing a desk, chair, computer and cabinets. Our argument is that even the smallest office would cost £50 per week, without rates, water etc. However, their view is that as the client hardly uses it because he is working away, we can only claim about £4/£5 per week. If we rented an office we would pay the same rent regardless of how much we use it.

Have HMRC hardened their attitude and should we fight it?

Prudhoe

 

Replies (21)

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By Duggimon
02nd Feb 2016 12:18

You're calculation is baseless

You can't include use of home based on what it would cost to rent a similar commercial office, you can either use the approved standard rates per HMRC ( http://www.hmrc.gov.uk/manuals/bimmanual/bim75010.htm ) or work out an apportionment of bills, assuming the client works every Saturday you would use the total bills for the house divided by seven divided by the number of rooms in the house.

I would be surprised if either came out anywhere near £2600.

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By Martin B
02nd Feb 2016 12:42

Use of home as office

flagging

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By nrw
02nd Feb 2016 12:45

HMRC's approved standard rates are presumably low in expensive areas (eg. central London).

Someone I know was recently informed by their accountant that a reasonable basis for calculation for a home office is to remove the 'non-liveable' rooms (eg. kitchen, bathrooms) and then divide the rent by the number of remaining rooms.

For example: a flat with a living room, kitchen/dining room, two bedrooms and two bathrooms - where one bedroom is used is an office - would give rise to one-third of the rent being allocated to a home office.

Does this sound in/correct?

 

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PJ
By paulgrca.net
02nd Feb 2016 13:07

Staggering!

Nothing else I can add without being derogatory.

 

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By DMGbus
02nd Feb 2016 13:13

Total costs divided by number of rooms

For a Ltd Co I would normally recommend a rental arrangement be put in place and the rate of something close to actual proportionate costs of the room.

Total household costs multiplied by x %, where x = proportion of house that the office is.

The director's tax return would have SA105 pages completed to reflect rent paid by company and proportionate costs.  

 

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By mabzden
02nd Feb 2016 13:16

Contentious issue

You can either use the (ungenerous) flat rates suggested by HMRC or work out a custom figure for the client based on total home costs, the size of the home, the area used for work purposes and the amount of time spent working from home.

This is a sensitive issue for HMRC - they don't want everyone putting in big claims for Use of Home, especially as it isn't a "Wholly and Exclusively" expense and (in their minds at least) they're only allowing as a concession. So you need to do proper calculations and be able to defend your position if asked.

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By Old Greying Accountant
02nd Feb 2016 13:30

You can't ...

... put up use of home in proportion to increased turnover. I would never go above £10pw without some sort of calculation described by nrw backing it up.

That said, you say "company accounts". If so you can claim whatever rent you like, and in a company you are better describing it as rent rather than use of home (which is more apt for sole trade/ partnership accounts).

HMRC cannot disallow a claim for rent as long as it is paid, and a credit to DLA will be deemed payment. You are best advised setting up a simple licence though to formalise things

The problem you could have is that the income should go on the personal tax return of the director, with relevant expenses against it, which may be rise to a higher rate tax liability, which is why it is best to restrict the rent to the expense actually incurred to avoid swapping a 20% CT liability for a 42% personal one!

EDIT, took too long typing and missed de bus (pun intended).

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By The Minion
02nd Feb 2016 13:30

2020 have a calculator in their tax tips and tools, but

i must say i find it hard to see how a single day can cost £50.

 

I seem to remember a case a few years back of a contractor setting a room aside specifically in his house and basing his use of home claim on that as a fraction.

 

as i recall it was accepted but then he decided to sell the house claimed PPR but the calculation of the chargeable gain was far from beneficial and he lost at FTT. expensive in the long run, we never have a room specifically set aside for any clients, unless they actually have, rather we look to try and use the "additional costs that arose because someone was working in the house when they would not normally be there" even down to taking meter readings etc.

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By Old Greying Accountant
02nd Feb 2016 13:32

Erm ...

The Minion wrote:

i must say i find it hard to see how a single day can cost £50.

... who mentioned £50 per day?

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By nrw
02nd Feb 2016 13:35

.... and a single room can cost a lot more than £50 / day in central London!

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By The Minion
02nd Feb 2016 13:38

am i reading too much into...

He is usually only at home at weekends, although is often working Saturdays as well, so I usually can only see him Sunday evenings.

 

So to me the house is only able to be used maybe one day at weekends so £50 pw = £50 per day?

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By justsotax
02nd Feb 2016 14:48

I usually use my rented office from

9-5 should I disallow the rest because I am not actually using it!?...not sure whether its wishing to play devils advocate or, just proposing a legitimate way forward that benefits the client.  Does he store any records/business equipment etc in this room...does he retain confidential documents etc.  If w don't watch out we will just become an unpaid government department, too many accept the Revenues views/opinion without challenge. 

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Stepurhan
By stepurhan
02nd Feb 2016 15:28

Percentage of total use

justsotax wrote:
9-5 should I disallow the rest because I am not actually using it!?
Business use a percentage of total use. So if you use a room 8 hours a day, 6 for business and 2 for personal then you claim 75% of the relevant expenses.

Presumably your office does not see any use other than as your office, so 100% claim of expenses. As others have said, having a 100% claim in respect of any part of your home is likely to come back to bite you on later sale. 100% business use means that part of the property has ceased to be PRR.

As for "accepting the Revenue's view without challenge", that is not what we are talking about here. There is a huge gulf between completely ludicrous made-up figures and just rolling over for whatever HMRC say. I think you will find most accountants will opt for the largest amount they feel can be robustly defended if challenged, given the evidence available.

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By cheekychappy
02nd Feb 2016 14:55

If you bought a Biro, would you put through the cost of a Biro, or would you put through what it would have cost had you bought a Parker?

I can’t believe that you would pluck a figure out of thin air, then wonder why the figure is now under scrutiny.

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By Tim Vane
02nd Feb 2016 14:55

I like the idea of increasing all allowable expenses in line with turnover. Can't understand how HMRC could possibly disagree with that.

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By nrw
02nd Feb 2016 15:32

Bear in mind that some people rent their homes, so are unaffected by PRR rules.

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Stepurhan
By stepurhan
02nd Feb 2016 15:37

Relevant info

nrw wrote:
Bear in mind that some people rent their homes, so are unaffected by PRR rules.
True enough, but given the effect on those that do own their home, it is an important thing to be aware of.

It also shouldn't really be relevant to the claim either. Either the claim is realistic based on actual use or it isn't.

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RLI
By lionofludesch
02nd Feb 2016 17:07

Not a bad idea though

I like the OP's thinking.

I'm happy to do my accounts based on what I might have spent.

Just so long as HMRC don't want to include what I might have earned ....... :-((

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By Old Greying Accountant
02nd Feb 2016 17:09

But ...

... although the wider debate is interesting, to re-iterate, this is a company, the rent can be whatever the director wants to charge, HMRC have no right to challenge - the problem is the rental income tax liability on the director's personal tax return.

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Stepurhan
By stepurhan
02nd Feb 2016 17:21

True but....

As already pointed out by you, they could then only claim the appropriate proportion of expenses on the personal return. HMRC do have the right to challenge that. Unless they have appreciable unused personal allowance then the tax on the difference will be at least 20% (no saving) and might be higher.

So what is reasonable to claim as expenses is still almost certain to be the main factor in determining the rent figure.

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By Old Greying Accountant
02nd Feb 2016 17:32

Exactly ...

... which is the point the OP needs to take on board, you can't just stick your finger in the air and put a figure in the company accounts, it has consequences elsewhere, which unless they failed to communicate this properly to the OP, HMRC have failed to grasp too.

Yes is semantics, but it is very important and very relevant.

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