Expenses and working from home : what you need to know
In the 21st century, people work from home for a vast number of reasons. As more and more work can be carried out on-line, many self-employed, desk-based workers choose to dedicate a room of their home to their business. Others might decide to use their own kitchen or studio to provide their services while their business gets off the ground. And since 2020, with the COVID-19 pandemic, government guidelines forced so many more to stay at home. As the crisis has passed, employers have found that some workers prefer the convenience of working from home, while others have adopted hybrid working or have returned to the workplace full-time. Whether you are based from home full-time, for a few hours a week or, indeed, were required to work from home for any length of time, there are implications for the expenses you can claim. Let’s find out more!
Home office expenses
While in the past, small businesses were set up to operate from the “kitchen table”, with the expansion of the internet, suddenly working from home became a much more accessible and realistic option for many people. However, setting up a home office necessarily entails expense.
In addition to this basic equipment, there are the costs of running the home office – including a stable internet connection, mobile phone, specialist software, office supplies such as printer ink, paper, pens and so on, as well as electricity, water, rent, council tax etc.
There are, of course, certain other costs that cannot legitimately be reclaimed, including the costs of clothing (unless it is a uniform) and meal allowances (unless you are required to work away from the home office). Relocation expenses when the employee is required to move to a different part of the country are covered under different provisions.
There are a wide range of expenses involved in working from home, depending on the nature of the business. Many costs are common to all businesses, but whether and how they can be claimed as tax-deductible expenses largely depends on whether the worker is self-employed, an employee, or runs a limited company.
Businesses which are run as limited companies can reclaim their working-from-home expenses in one of two ways: either by using the HMRC flat-rate system or by establishing a rental agreement between the limited company and the worker.
The HMRC flat-rate scheme
By far the simplest way to reclaim expenses for working from home for limited companies is to use the HMRC flat-rate scheme. Launched in the 2021–2022 tax year, this scheme sets a flat-rate of £6 per week to cover the costs of running a business from home. Under this scheme, there is no need to keep receipts or track the bills you pay. Six pounds a week may not sound like a lot, but it adds up to £312 a year. That said, and if your expenses are likely to amount to more than this every year – say you have significant printing costs likely to exceed £312 – then another option may be more profitable, albeit more time-consuming.
Rental agreements and limited companies
If you anticipate that the costs of operating your business from home are likely to exceed the HMRC flat-rate allowance of £6 per week, you may choose to opt for the more complex solution of establishing a rental agreement between yourself and your limited company. Under this mechanism, your company rents a proportion of your home and a proportion of your mortgage and bills can then be claimed as business expenses.
When preparing the rental agreement, several aspects need to be taken into account, such as the surface area being used, the amount of the rent, and the length of time the space is used for business activities.
Some experts advise against dedicating a single room in a home to a business, as it can lead to tax implications when selling the house at a later date. Care should also be taken as any income from the rent of office space must then be declared in your personal income tax declaration, which could mean the arrangement is less financially efficient than anticipated.
For many self-employed workers, one of the major benefits of their work is the ability to be home-based. The convenience of avoiding the cost and energy involved in the daily commute to work is in itself enough to turn the head of many desk-based workers. The flexibility of being able to organise working hours around family responsibilities appeals to many and as for people with disabilities, working from home can open up a whole world of new opportunities for part-time or full-time work.
As the COVID-19 pandemic spread, workers all over the country were advised to stay at home, and to work from home where at all possible. Millions of people and businesses were affected by this for several months.
Although commuting costs and business operating costs were slashed as a result, almost everyone saw their home costs rising, as they spent the best part of 24 hours a day in their homes. To help mitigate this, HMRC introduced tax relief measures, ensuring that workers forced to work from home would not be unduly out of pocked.
If your employer obliges you to work from home, or indeed if the government insists you work from home, you are therefore eligible for £6 per week tax relief, which can be deducted from your taxable income.
For all employees who had to work from home during the 2020–2021 and 2021–2022 tax years, there is still time to claim this allowance. HMRC has indicated that claims can be backdated and that the deadlines for filing claims for the 2021–2021 and 2021–2022 tax years are 5 April 2025 and 5 April 2026, respectively.
Alternatively, you can keep track of your actual working-from-home expenses and file an expenses claim with your employer. If the expenses are eligible, they will reimburse you and then file their own tax relief claim in turn.
You should note, however, that if you choose to work from home, you are not eligible to claim tax relief under this measure.
Working from home is popular with many people due to its flexibility, convenience and the opportunities it presents. Depending on the way in which you choose to reclaim your business expenses, you may need to track your costs accurately and in a timely manner. Many people turn to a Mooncard corporate card to streamline this process, simplifying what used to be a complex procedure. Find out more by booking a demonstration!
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