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Self Assessment: New guidance issued on working from home

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18th Jan 2007
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If you are still sitting on any SA returns, you may want to put them on hold for a minute or two and read this. HMRC have just overhauled their guidance on what the self-employed may or may not claim when working from home, and the result might produce a few changes to your normal calculations.

In the past, you will have had it drilled into you that some expenses are incurred with a private subconscious motive and so are not allowable at all (known as the “fatal duality”), whilst others may have been incurred at least in part for some private motive, but you are nevertheless allowed to claim a proportion. This created some rather strange results – the case of the barrister Mallalieu v Drummond [1983] 57 TC 330 – no claim for clothes as there was a subconscious motive of warmth and decency, contrasted with the case of Wildbore v Luker [1951] 33 TC 46 – allowed a proportion of a claim for rates in a public house, whereby the accommodation was in part private, and the rates payment clearly suffered from duality of purpose. The distinction for what you can and cannot claim has I will admit often foxed me.

According to the updated Business Income Manual, it is now OK to claim a great deal more expenses in relation to self-employed home working than you might have ever contemplated. You may now claim a proportion of telephone line rental on a domestic phone, a proportion of exterior house repairs, in fact almost every self-employed person will be able to claim something, even if it is only £2 per week.

What is the reason for HMRC’s change of heart?
It is really a change of emphasis, and with it interpretation as BIM47815 “Specific deductions: use of home: apportioning the expenditure” says: “The courts have approved apportioning household expenses. Templeman J in Caillebotte v Quinn [1975] 50TC222 at page 227F-G said:
"… it is possible to apportion the use and cost of a room on a time basis, and to allow the expense of the room during the hours in which it is used exclusively for business purposes, in the same way as it is possible to calculate the business expenses of a car which is sometimes used for business purposes exclusively and sometimes used for pleasure."

There is no mention of Mallalieu and duality in this section, and so this is going to mark a major change in reasoning for some of the "old school" at HMRC (despite the fact that the case quoted above dates from 1975).

As this is tax, you need to establish the underlying facts, and different traders organise their businesses in different ways, (so this rules out the idea of flat fixed rate deductions), it depends on the expense incurred. It is a question of apportioning the relevant expense HMRC suggest:

  • Area: what proportion in terms of area of the home is used for business purposes?
  • Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
  • Time: how long is it used for business purposes, as compared to any other use?

HMRC point out that expenses broadly fall into two categories, fixed costs and running costs.

Fixed costs relate to the whole house and have to be paid even if there is no business use. These include costs such as, Council Tax, mortgage interest, insurance, water rates, general repairs and rent. If part of the home is set aside solely for business use for a specific period then a part of these costs is allowable, these will need to be apportioned by area and time, as follows:

Insurance – apportion part of the domestic policy (unless there is a separate business policy)
Council Tax - apportion
Mortgage interest – apportion interest (not repayments)
Rent - apportion
Repairs and maintenance – apportion, including interior and exterior decoration and roof repairs.
*There is no detail on fixed water rates, but it is assumed that these can be apportioned. The manual later says: “In the case of minor business use of the premises, such as writing up records, there is no business use of water and so none of the water charge is allowable.” This does not square up with the revised guidance, but the cost is going to be so small that I would not worry about it.

Running costs relate to expenses where the bill may vary with the amount of business use. They include telephone line rental, cleaning, heat and light and metered water. HMRC officers are now instructed to “accept a claim based on any reasonable basis.” Apportionment should be on the basis of useage.

Telephone - The big change is to the treatment of telephone line rental. Instructions are to now allow a proportion of the line rental (based on the ratio of business use to total use). This proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure.

BIM47825 gives some examples of what is claimable. It notes that “if there is only minor use, for example writing up the business records at home, you may accept a reasonable estimate without detailed enquiry.” The examples reproduced here are HMRC’s, the comments in italics are mine.

Example 1
Angela writes up her business records at home. She uses a room solely for business use for a short period each week. She estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.
Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.

Example 2
Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade (he needs to ensure he knows the CGT treatment here). 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.
Most people will not be able to estimate floor area, so another basis such as by no. of rooms may be more practical. It might be easier to claim the running costs according to useage time, or to do some test readings and apportion those.

Example 3
Bert runs a small business. He uses the spare bedroom at home as his office except for a week at Easter and a week at Christmas. All he does is to write up his records, once a week.
The house has 10 rooms. Bert calculates that his business expense, based on 1/10 of the total costs would be £450. Bert recognises that this is far too much for what he actually does at home.
Bert estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.
Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.

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.

Example 5
The facts are as in example 4. Chris has some work done on the house. She has the exterior painted and at the same time has the dining room re-decorated. What, if anything, can she claim as a deduction?
The exterior painting is a general household cost. She can claim a proportion based on business use. Chris does not use her dining room for business purposes. The cost of redecorating the dining room is not an allowable expense.

Example 6
Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours. The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.

After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480). The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.

Example 7
Bill entertains a number of customers at his home. Each time he hires caterers and also a firm of cleaners. Although Bill has used his home for business purposes, he cannot claim any of the costs as there is legislation that disallows entertaining costs.

Comment
It is great to have some examples at last, and this will put an end to all those arguments with officers about duality and mortgage interest! On saying that, do remember that HMRC’s manuals are only their interpretation, they are no replacement for the actual statute and you cannot rely on them in court.

And finally…
It is always a bit of a game trying to keep up with what is being updated in HMRC’s manuals, and with SA filing a matter of days away one wonders if this latest one has been deliberately hidden? This Business Income Manual update says it came across in December (it probably hit HMRC’s systems then) but did not come across into the public domain until this week. No mention of it on the manual update RSS feeds either, so really it was just quite lucky that I stumbled on it.

The best selling Practical Tax Guide - "What expenses can I claim, when working from home" is the definitive guide to this topic by Nichola Ross Martin FCA and compares and contrasts deductions from the point of view of the self-employed, the employee and the director.

For subscription details to Practical Tax Guide Series visit Rossmartin.co.uk or email [email protected]

Replies (26)

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By AnonymousUser
24th Jan 2007 13:30

work at home council tax and business rates
Council tax? If you claim this wont you be required to pay business rates>
Thsnk you
Pesha

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By Malcolm Veall
24th Jan 2007 22:25

Business Rates
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.

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By tim hervey
01st Feb 2007 15:38

Will the CGT position change be as well disguised?
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?

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By User deleted
29th Jan 2007 18:49

Smallest laptop?
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!

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By mikewhit
28th Jan 2007 15:59

Smallest room
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 ...)

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By User deleted
26th Jan 2007 11:19

David
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"?

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By Malcolm Veall
24th Jan 2007 22:41

"Cost Incurred"
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.

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By Malcolm Veall
24th Jan 2007 10:49

What about certainty
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.

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By User deleted
24th Jan 2007 11:35

I see your point, but the example is deficient.
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!

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By DavidShepherd
23rd Jan 2007 18:45

Realistic
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.

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By User deleted
23rd Jan 2007 21:38

Blistering barnacles
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?

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By SimonP
23rd Jan 2007 18:23

Driveway resurface or parking lines redrawn?
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-[***]-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

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By SimonP
23rd Jan 2007 12:38

CGT worries are no worry
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.

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By Taxi
23rd Jan 2007 13:57

Will HMRC be concerned when "Use of home" claims suddenly rocket
Given by the reponse to this, and the sheer volume of you who have emailed me, I think I can safely guess "Yes"!

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By Barkster
23rd Jan 2007 15:20

I like it !
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 !!

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the sea otter
By memyself-eye
22nd Jan 2007 22:49

CGT?
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 ....

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By crbookkeeping
22nd Jan 2007 22:05

Sudden increase of premises expenses due to new rules
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.

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By stevec.cooperparry.com
22nd Jan 2007 16:39

99% business use
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

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By cbales
22nd Jan 2007 18:43

Helpful article
Thank you Nichola. This is a very useful article.

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By Malcolm Veall
19th Jan 2007 11:50

Agreed - Almost Exclusive
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.

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By Taxi
19th Jan 2007 14:02

I put in the italic comment in the case of Bill - as in the orig
To be fair he is the only one who has a potenital CGT problem the other's use their rooms "soley" not exclusively.

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By Malcolm Veall
19th Jan 2007 00:22

Example 3 is inconsistent
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.

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Judi Castille senior partner of SP Consultancy LLP Kent, company formations and tax structures
By freelance32
18th Jan 2007 17:49

Late information HMRC - late information Clients
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.

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By frauke
18th Jan 2007 15:42

Common Sense prevailing?
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.

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By User deleted
06th Feb 2007 21:14

Tim
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!

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By User deleted
22nd Feb 2007 14:45

Shifting goalposts?
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?

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