Working From Home Expenses: What’s Claimable and Non-Claimable

Working from home has become increasingly common, and it’s crucial to understand which expenses you can claim on your taxes. Claiming legitimate home office expenses can significantly reduce your tax bill and increase your net income. To ensure compliance and avoid complications with HM Revenue and Customs (HMRC), it’s essential to know the allowable and non-allowable expenses.

Not all expenses are eligible for tax relief. Only costs that are “wholly, exclusively, and necessarily” incurred in performing your job duties qualify. For mixed-use expenses such as a home internet connection, you can claim only the portion related to your work activities.

The rules for claiming expenses vary significantly between employees and self-employed individuals. Employees can only claim unreimbursed expenses and must maintain accurate records and evidence of these expenses. In contrast, self-employed persons can claim a broader range of expenses but must also provide detailed documentation to justify their claims to HMRC.

Eligibility Criteria for Home Office Expense Claims

Employees working from home regularly or full-time, especially due to COVID-19, may qualify for tax relief on home office expenses. Eligibility for such claims is contingent upon meeting specific criteria set by HMRC.

Determining Employment Status

Firstly, you must determine whether you are employed or self-employed. If you are self-employed, you can claim tax relief on a wider range of expenses related to your business, including the cost of running a home office. However, if you are an employee, you can only claim tax relief on expenses that are necessary for you to perform your job duties.

Understanding HMRC Guidelines

To claim tax relief on home office expenses, you must understand the guidelines set out by HM Revenue and Customs (HMRC). According to HMRC, you can claim tax relief on the additional costs of working from home, such as heating, electricity, and internet costs.

Impact of Coronavirus on Working Habits

Due to the coronavirus pandemic, many employees have been forced to work from home. If you have been working from home because of government restrictions or because your employer has asked you to work from home, you may be eligible to claim tax relief on home office expenses.

It is important to note that you can only claim tax relief on expenses that you have actually incurred. You cannot claim tax relief on expenses that have been reimbursed by your employer.

Types of Allowable Home Office Expenses

The scope of allowable expenses for your home office varies based on the method chosen for claims. To better understand the allowable expenses for limited companies and directors, it is beneficial to review detailed guidelines that pertain specifically to business structures.

Direct Expenses for Home Offices

Direct expenses are those that relate solely to your home office. These expenses are fully deductible, as long as they are incurred wholly and exclusively for business purposes. Examples of direct expenses include:

• Rent or mortgage interest
• Council tax
• Utilities
• Insurance

Proportional Costs for Mixed Use

If you use your home office for both business and personal purposes, you can only claim a proportion of the costs. This is because you cannot claim for expenses that are not wholly and exclusively for business purposes. Examples of proportional costs include:

• Rent or mortgage interest
• Council tax
• Utilities
• Insurance

To calculate the proportion of costs that you can claim, you will need to work out the percentage of your home that is used for business purposes. You can do this by measuring the floor space used for your home office and dividing it by the total floor space of your home.

Specialist Equipment and Furniture

If you need to buy specialist equipment or furniture for your home office, you can claim the full cost as an allowable expense. Examples of specialist equipment and furniture include:

• Office equipment
• Furniture
• Computers

It is important to note that you can only claim for items that are used solely for business purposes. If an item is used for both business and personal purposes, you can only claim a proportion of the cost.

Calculating Work From Home Expenses

When working from home, you may be eligible to claim back certain expenses, though determining what qualifies can be complex. We’ll explore effective strategies for calculating your work from home expenses, including the option of using a tax calculator for more accurate assessments.

Flat Rate vs Actual Costs

One of the first decisions you’ll need to make is whether to claim a flat rate or your actual costs. If you choose to claim a flat rate, you can claim £6 a week without needing to provide any evidence of your costs. This is the simplest option, but it may not be the most accurate.

If you choose to claim your actual costs, you’ll need to keep records of your expenses. This can include things like electricity, gas, and internet bills. You’ll then need to work out the proportion of these costs that relate to your work. For example, if you use your internet connection 50% of the time for work, you can claim 50% of the cost.

Simplified Expenses Scheme

Another option is to use the simplified expenses scheme. This is a flat rate that you can claim based on the number of hours you work from home each month. This rate covers the costs of running your home, such as heating and lighting.

If you work from home for 25 hours or more each month, you can claim a flat rate of £10 a month. If you work for fewer than 25 hours a month, you can claim £6 a month.

Using a Tax Calculator

If you’re not sure which method is best for you, you can use a tax calculator to help you work it out. A tax calculator will take into account your income, expenses, and other factors to help you work out how much you can claim.

When using a tax calculator, make sure you enter all your information accurately. This will ensure that you get an accurate estimate of your expenses.

Claiming Expenses on Tax Returns

Claiming home expenses for tax relief requires a clear understanding of what is and isn’t allowable. This section provides essential information on how to navigate these claims effectively.

PAYE vs Self-Assessment

If you are employed and pay tax through the Pay As You Earn (PAYE) system, you can claim tax relief for some expenses by filling out a P87 form. This includes expenses such as using your own vehicle for work purposes, travel and subsistence, and tools and equipment.

For self-employed individuals, claiming expenses requires completing a Self-Assessment tax return. This document covers a range of expenses from office equipment to rent and utilities.

Filling Out the P87 Form

To claim expenses on a P87 form, you need to provide details of the expenses you want to claim. You will also need to provide receipts or other evidence to support your claim. You can claim expenses for the current tax year and the previous four tax years.

Records and Receipts

It is important to keep records and receipts of all expenses you want to claim. This includes invoices, receipts, and bank statements. You should keep these records for at least six years in case HM Revenue and Customs (HMRC) decides to investigate your tax affairs.

HMRC may ask you to provide evidence to support your claim, so it is important to keep accurate records. If you cannot provide evidence to support your claim, HMRC may reject your claim and you may have to pay back any tax relief you received.

Understanding Tax Codes and Relief

As a home-based worker, you might qualify for tax relief on various expenses. A thorough understanding of adjustments to your PAYE tax code can significantly enhance your ability to optimise your tax situation.

Adjustments to PAYE Tax Code

If you are eligible for tax relief, you may receive it through adjustments to your PAYE tax code. This means that your tax-free allowance will increase, resulting in a lower amount of tax being deducted from your pay each month. You can find your PAYE tax code on your payslip or P45.

Tax Relief for Higher-Rate Taxpayers

If you are a higher-rate taxpayer, you can claim tax relief on your expenses at your marginal tax rate. This means that if you pay tax at 40%, you can claim 40% tax relief on your expenses. However, you must keep accurate records of your expenses and be able to provide evidence if requested by HMRC.

Rebates for Previous Tax Years

If you have been working from home for several years and have not claimed tax relief on your expenses, you may be able to claim a rebate for previous tax years. The amount you can claim will depend on your individual circumstances and the expenses you have incurred.

To claim a rebate, you will need to complete a tax return for the relevant tax year. If you are unsure about how to do this, you can seek advice from a professional accountant or tax advisor.

Special Considerations for Different Business Structures

When it comes to claiming expenses for working from home, there are different rules depending on the type of business structure you have. In this section, we will discuss the special considerations for sole traders and partnerships, as well as limited companies and directors.

Sole Traders and Partnerships

If you are a sole trader or in a partnership, you can claim expenses for business use of your home. However, you cannot claim for expenses that relate to the private use of your home, such as mortgage interest, rent, or council tax. You can only claim for expenses that relate to the part of your home that is used solely for business purposes.

It is important to keep accurate records of the expenses you claim, as HMRC may ask to see evidence of your calculations. You should also be aware that if you sell your home, you may have to pay capital gains tax on the part of your home that was used for business purposes.

Limited Companies and Directors

If you are a director of a limited company, you can claim expenses for working from home if you have a rental agreement between yourself and the company. This agreement should set out the terms and conditions of the rental, and should be signed by both parties.

You can claim for expenses such as rent, council tax, and utility bills, but only for the part of your home that is used solely for business purposes. You cannot claim for expenses that relate to the private use of your home.

Professional Advice and HMRC Compliance

Understanding HMRC’s rules is crucial when claiming home office expenses. Consulting with an accountant not only ensures compliance but also optimises your claims effectively.

Consulting with an Accountant

An accountant can help you understand the rules and regulations set out by HMRC, and provide you with advice on what expenses you can claim for. They can also help you keep track of your expenses throughout the year, making it easier to calculate your tax relief at the end of the year.

Understanding HMRC Rules and Audits

It is important to understand the rules set out by HMRC when claiming expenses for working from home. HMRC has provided guidelines on what expenses can be claimed, such as appropriate facilities and equipment, but it is important to prove that the expenses claimed are wholly and exclusively for business purposes.

It is also important to keep accurate records of all expenses claimed, as HMRC may audit your tax return at any time. By understanding the rules set out by HMRC, you can ensure that you are claiming the correct expenses and avoid any penalties for incorrect claims.

You can find more information on HMRC rules and regulations on their website, as well as through their online portal. It is important to ensure that you are following the most up-to-date guidelines set out by HMRC to avoid any issues with your tax return.

In addition to understanding HMRC rules, it is also important to consider capital gains tax when claiming expenses for working from home. If you are using a room in your home exclusively for business purposes, you may be liable for capital gains tax when you sell your home. An accountant can help you understand the implications of capital gains tax and ensure that you are not caught out by unexpected tax bills.