Director of Tax www.rossmartin.co.uk
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What expenses can I claim when working from home?

7th Jan 2008
Director of Tax www.rossmartin.co.uk
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It’s a pretty basic question; “What can I claim, for working from home?” The answer is straightforward only when you recognise the variations in practice. The self-employed have different rules compared to employees, and not all employees are treated equally. In this article I am looking at claims from the perspective of the self-employed.

Introduction - motive and duality
You will have had it drilled into you from text books 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 creates some rather strange results – the case of the barrister Mallalieu v Drummond [1983] 57 TC 330 – no claim for work 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.

ITTOIA 2005 clears up the past confusions to some extent, it says:
S 34 Expenses not wholly and exclusively for trade and unconnected losses
(1) In calculating the profits of a trade, no deduction is allowed for –
(a) expenses not incurred wholly and exclusively for the purposes of the trade, or
(b) losses not connected with or arising our of the trade.
(2) If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expenses which is incurred wholly and exclusively for the purposes of the trade.

HMRC updated their Business Income Manual for this in January 2007 and the result is that it is now OK to claim a great deal more expenses in relation to self-employed home working than you might have contemplated in the past. You may now claim a proportion of telephone fixed 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.

The interpretation in HMRC’s 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, or ITTOIA, it appears, and this marks a major change in reasoning for some of the "old school" at HMRC (and in accountancy practices), despite the fact that the case quoted above dates from 1975.

Apportioning expenses: Know your client!
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), and it depends on which type of expense is incurred.

So, the key to claiming expenses is to ensure that they are reasonable in relation to the type of home-office user which means that the first thing to do is make sure that you know your client and exactly how and where he works at home.

It may be useful to break down 'home-office users' as part of your 'know your client” procedure. You need to work out what amount of work is done at home in order to apportion expenses. I suggest that there are five basic types of self-employed home worker:

  1. The 'kitchen table' - has no distinct office as such, but settles down at the kitchen table once a week to hand write invoices and occasionally write up the books.
  2. The 'part-time home PC user' - pushes the children off the PC every other night to type invoices, check email, and maintain basic books and records.
  3. The 'serious PC' - has a PC which the children will not dare to touch (they have their own), in its own corner of a room on a desk, not an office as such, but a clearly defined space.
  4. The 'in-home office' - has partly converted a bedroom into an office, which is mainly, but probably not exclusively used for business; it may store domestic and private belongings, for instance.
  5. The 'dedicated office' - the office is just that, possibly a converted garage, room or loft, or maybe free standing in the garden. This office may or may not be used exclusively for the business. Any private use is incidental/occasional, perhaps limited to storage of private records.

Planning points

  • My user types 1 to 3 will be unlikely to make any high claims for use of home, as the proportion of their business use is likely to be very low compared to the private use.
  • Some inspectors will suggest that mortgage interest is not allowable, because of a case called Baird v. Williams [1999] STC 635. This case concerned an employee, and has no relevance to the self-employed.
  • Users 1 to 4. will not have any capital gains problems on the sale of their main residences, because they are not using any part of their home exclusively.
  • User 5’s office may be used exclusively. Any home office will be a business asset, and so benefit from business taper relief (until 5 April 2008, when CGT reform removes this relief).

Once you have an idea of what your client actually does on a day to day basis, take a good look at his expenses:

Types of expenses to claim – whole or apportioned
The following list of expenses suggests methods of apportionment, for instance, it is much more accurate if you can work out your exact electricity use, but this may be impractical to do so, in which case you need to work out a % use. If you are working out a % use for light and heat, then it may be practical to use the same ratio for other costs, but, this depends on the type of user and the equipment used. Expenses broadly fall into two categories, fixed costs and running costs. Fixed costs will have to be apportioned, running costs can generally be calculated by usage.

  • Light and heat – apportion by metered use, failing that by proportion based on square meter of room space use, or by number of rooms, and maybe factor in the % use on an hourly basis. Ask your client what sort of heating they use, this may be the most expensive part of the claim (I stupidly used a bar heater once and my electricity doubled).
  • Telephone (including line rental) – apportion by call time (incoming and outgoing).
  • Rent – apportion by square meter/room and % use.
  • Council tax – as rent
  • Mortgage interest – as rent, unless part of mortgage relates to part used exclusively for business, for instance, if you got a 'top-up' to convert the garage into an office.
  • Insurance – as rent, apportion part of the general household policy, and claim all of a dedicated business policy as a normal business expense.
  • Repairs to business equipment – all allowable, restrict if private use
  • Capital allowances on business equipment, restrict if private use.
  • Capital allowances on costs of fixtures (such as business shelving) erected for the home office.
  • ISP / Broadband costs – by usage time, or as per telephone, or per other costs
  • Cleaning – as rent
  • Re-decoration and repairs, internal and external – as rent.

Expenses not to claim

  • Water rates, if there is no business use of water. A business with employees will need water.

Notes on apportionment of expenses
It is sensible to apportion:

  • By no. of rooms (do not count halls, lavatories, small bathrooms, pantries)
  • By sq. metre, or floor area, if you have the measurements to hand
  • By electricity metre, if it is possible to make test readings with all other household appliances switched off.
  • By water meter, if metered, not if unmetered.
  • By % of actual time in use

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 £4,500. 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 usage 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 £6,600. 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 £1,500 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 four hours each day, though often this is spread over his working eight 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 two 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.

Capital gains issues
When there was rapid house price inflation there was a distinct possibility on a disposal of a main residence that a capital gain could arise on any part of the home which had been claimed as in use exclusively for a business purpose. Basically, if you claimed that 1/5th of your home was used for business, then 1/5 of any capital gain on disposal would be from the disposal of an asset not covered by Principal Private residence relief. Following the introduction of business taper relief most gains on the business part of any house would be minimal and normally covered by the annual exemption.

Following the proposed Finance Act 2008 changes to capital gains tax, it may be appropriate to review a client's capital gains position from time to time to ensure that there are no issues. However, it is important to note that where a part of a home has no exclusive business use there will be no capital gains issues.

Replies (18)

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By Anonymous
08th May 2009 10:15

A question of judgement
Peter,
It is not possible to give an example to suit every situation. it is a case of reveiwing the use of the room(s) and then applying your judgement as to what is fair. If you end up taking a case to tribunal this is exactly what the tribunal will do.
So keep records of what you have claimed and why .

The controversial part is what to do if a room is not used for business purposes at night. It seems logical to me that if is actively being used for private purposes when the busines in not in operation, then you will need to apportion the cost. If however, there is no private use as it is just left empty, it seems sensible to apportion all to business. If you want to split hairs you could keep a diary for the room and then apportion on that basis.

Obviously if you are working via a compay, it is much easier to grant yourself a licence and then just pay a fixed charge. You cannot do this as an individual with yourself though.

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By Anonymous
09th Mar 2009 17:03

Still too many unknowns
I agree with David Whiscombe – the HMRC examples add little clarity to a generally murky area.

In comparing the examples of Chris and Gordon, the only apparent difference is that Chris is using a room that is mainly a private room (the ‘living room’), whereas Gordon is using a room that on balance has a bigger business function (including housing various business equipment). Where do we draw the line?

Accountant in Brighton

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By Anonymous
22nd Apr 2008 09:28

Photo diary
If you have a "dual purpose" office it can be helpful to take photos of you using the room for business & private purposes . A photo record can be jolly helpful in demolishing a claim for CGT PPR restriction.

In my case it has also had the advantage of shaming me into tidying up my clutter.

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By Anonymous
20th Mar 2008 12:17

Publishing delays
I am doing some courses on Working From Home for Accountingweb, and so I have been updating my material for those as a priority.
Other than that it is just lack of time. Just running around like a mad thing trying to ensure that we have tax coverage of everything else which is current on the site. The other articles should be out soon!

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By AnonymousUser
01st Feb 2008 17:11

Next articles
Nichola

You mention in your comment on 9th Jan another 2 or 3 articles. Are you still intending to do these as I haven't seen them published and await with baited breath......!

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By keithdeane
18th Jan 2008 12:12

Use of water
Somewhat belatedly catching up with my New Year reading, I was taken by Tim Hervey's comment back to my early days as a tax inspector (I'm not going to say exactly when, but we were still using the 1952 Act...). I heard from a colleague of an apportionment of water rates by a self-employed accountant who worked from home. He claimed that he often received books from clients (especially jobbing builders) that were "covered in muck", so that frequent handwashing to rid himself of exclusively business dirt was an essential element of his business activity. Apparently sufficiently plausible (or inventive) for the apportionment claim to be allowed...

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By AnonymousUser
09th Jan 2008 14:38

Teachers
sorry to digress on this thread further but some care is needed here re teachers, certainly if we are considering primary. A couple of years ago things were changed again to give them release time in the week to do some/all of the things Grace mentions. I would suggest that a careful reading of their contracts and associated LEA terms and conditions is needed before reaching any firm conclusions. HMRC could argue that they could use school accommodation during the release time to do these tasks (since that is what it is for) so doing the work at home in the evening is now their choice. Also HMRC historically have always tended to dig their toes in on any employee expenses and anyone who wants to take the point should be ready with cast iron arguments.

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By GraceinGlasgow
09th Jan 2008 14:29

Expenses for Teachers
Dilwyn
I don't remember the details, but the rules for teachers changed a few years back, when they got a new standard contract. The contract said that they were required to do considerable marking & preparation work and in the nature of things much of this would have to be done in the house. This was because there were mutterings among the teachers that they should be paid overtime if they had to work outside school hours.
However, that then meant that home working was written into their contract so that any home office expense now became "necessarily" incurred in the performance of their duties. Your wife is entitled to claim her expenses as actually incurred. I would think heating the room for (say) two hours a night in term-time would be a good start. Not difficult to read the meter before & after & work out the cost.
The more specific you are about the cost and the more work you put into identifying the actual cost e.g. reading the meter, the less the Revenue can argue.

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By Anonymous
09th Jan 2008 12:29

Rules for the employee
- will follow next, and then owner-directors.

This is actually a three part article, but I think I might extend it to a four parter to include special considerations for offices in gardens/extensions, such as VAT and CGT.

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By AnonymousUser
09th Jan 2008 11:35

Self employed
Dilwyn I'm sure you've realised now but this article is about self-employed only. The rules for any expenses for employees are much tighter.

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By Sherlock
08th Jan 2008 16:58

Business rates exemption
In most cases the possibility of business rates is not an issue. This is because a tribunal case concerning an HMRC employee who worked at home was decided in favour of the individual.

Business rates are only an issue if either a prominent business plate outside the property advertises the individual's services and/or a succession of clients or customers visit the property regularly.

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By Sherlock
07th Jan 2008 13:08

Case law
At the upper end of the spectrum there is one case that was heard by the Commissioners regarding an accountant who worked from home. Gazelle v Servini demonstrates that a fairly substantial claim can be made, but obviously with the loss of some CGT PPR exemption.

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By Bobdick
08th Jan 2008 07:25

Limited Company use
I am currently arguing a case with an Inspector where the client operates as a limited company from his residence. What difference does this make to the expenses claimed? He is trying to disallow rent and rates after 6.5.06, water where it is not metered and light and heat over £2 per week. The client operates a catering business from an outhouse and the whole property is rented. Use of water and power is considerable and far outweighs private use.

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By markgosling
08th Jan 2008 09:49

Limited Companies
BOB

I believe the best way to deal with Limited Companies is for the Company to pay the Director rent for ue of the house as office. The Director has to declare the rental income on his pers tax return but can then deduct a proportion of expenses as per the above article. This is only worth the effort if you have a dedicated office in the home and do most of your work in the home office.

Nichola - Do you agree with this?

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By andrewtodd
08th Jan 2008 09:50

Business rates
I seem to recall being told a few years ago that there was an increasing risk of being assessed for business rates if one was overzealous in claiming home use.

I can see the logic re CGT only applying if there is a dedicated business proportion. Is the same true of business rates?

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By tim hervey
08th Jan 2008 09:59

Water rates and sewerage rates
Thanks for the timely reminder Nicola. This article is an update/repeat on your previous article, https://www.accountingweb.co.uk/cgi-bin/item.cgi?id=163992, which I have been referring to quite alot recently! The only point that has changed is with respect to water rates.

In that earlier article you said: "*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."

In this article, you say: "Expenses not to claim

Water rates, if there is no business use of water. A business with employees will need water."

Surely a self employed person uses water during their working day (eg tea, coffee, flushing loo) and so should claim a proportion. Or is this a bit like Mallalieu v Drummond in that such use of water is duality of purpose? What about washing the car used both privately and for buisness?

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By dilwynjones
08th Jan 2008 10:39

What about teachers?
In 2002, we tried to claim back some tax for the time my wife, a secondary school teacher, spent at home doing marking and preparation. The claim was rejected, on the grounds she was exercising personal choice to do the work at home, despite the fact the school was unheated, closed and alarmed in the evenings. However, it seems very similar to example 1 in the article.
We would be interested to hear if this type of claim was now allowable, or stood a better chance of success.

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By DavidW878
08th Jan 2008 12:56

Not so logical
Some of the HMRC examples show just how subjective this pseudo-science really is. Take Bill and Bert for example. Bill uses an office "exclusively" for his trade (though we are not told how often he uses it -so apparently it doesn't matter). It's OK for him to claim general costs by reference to area. Bert on the other hand uses a room for business - apparently exclusively (albeit infrequently) for most of the year - yet a similar apportionment for him is "far too much". Why, pray? Instead he estimates that the relevant is cost is £104, which is "a reasonable estimate" which "reflects the facts of the case." On what basis? As with Angela, the answer seems to be "no-one cares - no-one is going to argue about £2 a week".

Chris and Gordon are interesting too. Chris seems to be apportioning her fixed costs by reference to the small proportion of the whole 24-hour day that the room is used for business. Gordon seems to be apportioning by reference to the ten hours a day in which the room is actually used for any purpose (and including as business use the full eight hours a day even though he is actually present for only half that time). It's difficult to see why there's such a difference when Chris and Gordon are each using a room solely for a business purpose for some of the day and using it for non-business purposes for some of the day.

It's helpful to have some examples: but to suppose that they demonstrate any clear universal principle is a bit optimistic!

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