Working from home is becoming more prominent, and it isn’t difficult to see why. Working from home provides workers with intriguing benefits, and, assuming a business trusts its workers, many benefits for a business as well.
For an employer, having employees working out of the office allows for minimised office space, thus saving on rental and utility costs. Having some employees work from home often leads to happier and more productive employees, because on the employee/worker level, working from home allows the worker to make choices that ensure their productivity and efficiency are guaranteed. Stability and consistency contribute to the perfect working environment.
For entrepreneurs and founders, working from home provides the tempting advantage of lowering costs and working within a practical budget. Costs can be kept down, stability is maintained, and the worker has more freedom over their work.
Because of the clear advantages of working from home, more workers choose this path each year. The TUC reports that in 2005, only 1 in 20 worked from home, but by 2018 that number jumped to 1 in 16. With more people choosing this way of working, it is becoming more important that workers understand the tax implications of their work.
Determination of business expenses
One of the most daunting parts of approaching the tax system when working from home is determining what is eligible to be named as a business expense. For many, utilities and services become a point of uncertainty. When costs are used both for business and personal aspects, many workers choose one of two options: writing off the entire expense, which could get you into trouble; or claiming nothing, and you will miss out on valid benefits.
“The HMRC suggests a middle ground between the two.”
However, the HMRC suggests a middle ground between the two: make a sensible estimate of the proportion of each bill that applies to your work and claim that amount. The HMRC also provides an exhaustive manual with clear descriptions and examples of what can be claimed, and how much should be claimed. In general, claim the proportion of a cost that applies to the business, whether it be council tax, mortgage interest, rent, repairs, cleaning, metered water charges, etc.
Making it simpler
Luckily, the HMRC offers a simpler system for determining business expenses for those who work from home for more than 25 hours per month and are self-employed as a sole-trader or who operate an unincorporated business. This flat-rate system allows workers to skip calculations and use predetermined values based on the number of hours per month they work from home:
Hours worked from home per month
25 to 50
50 to 100
Flat rate per month
* note: these values apply only to utilities
For some, working from home involves having a room in their house that is a dedicated office. Because this area of the home no longer falls under the ‘private residence’ descriptor, when the home is sold, it could reduce the amount of capital gains tax relief you can claim.
In reality, for most people working from home, their office space is rarely just that; it may double as a bedroom, gym, or storage space. In these cases, the ‘private residence’ descriptor still applies.
Risk and reward
Working from home provides many powerful incentives, so the complexities of it certainly shouldn’t prevent you from considering it. However, because it is a relatively difficult system, it is always a good idea to consult a professional who can help you maximise your reward and minimise the risk.
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