If you’re working from home, you are lucky to have this opportunity. The flexibility to work from home as per your wish attracts and inspires people to set up their own business as the first priority. Nowadays, the coronavirus has forced people to work from home. To avoid the hassle of a full-time office-based job, stay home parents and disabled people prefer to work from home. In this handy blog, we’ll talk about the use of home as office for a limited company.
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What can I claim as Director while working from home?
If you’re using operating your limited company on commercial premises, the rent, insurance, business rates, utilities, insurance, and service charges are considered allowable expenses for your company that reduce business profits, which further leads to the reduction of corporation tax.
While working from home as a director, you can claim certain expenses back from your company for providing office space at your home.
You can get HMRC fixed home working allowance that is £6 per week and £312 per annum. Fortunately, HMRC doesn’t classify it as a benefit in kind and you don’t need to pay tax on it through self-assessment. If the cost of using home premises exceeds £6 per week, the directors can claim a fair proportion of their home running cost from the company.
In the first case, there will be a license agreement between the limited company and the director. As per the agreement, the limited company will be able to use a portion of your home and pay the director’s rent against it. You should work out the charges for the office space that is used by the company.
The rental income needs to be disclosed on personal tax returns. The director’s cost of providing space for the company will reduce his rental profit. No rental profit means no personal tax.
Calculation of cost of the Use of Home as Office :
Now, we will provide you with all the costs to consider while calculating the home expenses for the office premises. The general expenses to be considered are:
- Rent
- Electricity & gas
- Cleaning
- Contents insurance
- Council tax
- Service charges
We have exempted mortgage capital payments, as they’re not allowed to be used against the property income. Onwards from 2021, no mortgage expenses can be included as use of home as an office.
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Calculating a Fair Proportion of Home Expenses:
To calculate a fair proportion of home expenses used for offices, you can calculate the number of rooms excluding bathrooms, kitchens, and hallways. Then you have to see what percent of the time you are spending on the rooms for office use. If you’re renting a small portion of your home, you should also include that part only.
For instance, if you use a single room for the office and you spend 80% of your time on it, let’s say you have five rooms with kitchens, bathrooms and hallways.
If the total running cost of your home in a year is £10,000. You can claim a fair amount by £10,000 / 5 x 80% = £1,600.
It is the annual amount of rent you charge to the company on which there is no rental profit as there is £1,600 allowable expense against your rental income.
Since there’s no rental profit, there is no tax. Moreover, your company can save 19% of the corporation tax against £1,600 which makes around £304 of savings.
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Points to remember:
- To avoid corporation tax, the amount of rent should be fair as per the market rate. You can search out similar places and their rents for better calculations.
- You shouldn’t use your office room totally for the business, use a small part of it for your personal use to be protected from capital gains tax issues in the future.
- Go through your home insurance policy to check that using your home for business is fine.
- Check your renting agreement whether you can use your home for an office or not.
Quick Sum Up:
Whilst the use of home as an office for a limited company, you should examine whether the expenses that are incurring are genuinely for business purposes or not, and can you prove them?
If you are dubious about any issue, you can contact our certified chartered accountants in London for professional help.
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Disclaimer: This blog is written for general information on the use of home as office for a limited company.
