Work from home claim for company director
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Overview of work from home allowance for company director
As a limited company owner/director, you may well carry out some work or trade from home – occasionally, or on a regular basis. One of our most frequently asked questions by directors is which (if any) household expenses can you legitimately claim against your company’s tax bill?
You must ensure that work from home rules for a limited company directors are different for a sole trader and employees. Be careful when googling as this distinction can become blurred. We will cover those rules in 2 separate blogs. This article focuses on limited company director(s) only.
How can I claim work from home expenses as a company director?
Broadly speaking, there are three common ways for limited company directors to account for home working expenses you may incur whilst running your business;
- HMRC’s flat rate amount (No questions asked, no justification required)
- claiming a proportion of household expenses (Only incremental/additional costs)
- creating a formal rental agreement between you and your limited company
Let’s explore benefits and limitations of each option.
1. HMRC’s flat rate amount
This is a no questions asked, no justification required option when claiming working from home allowance for a company director. If you only work at home occasionally, then HMRC allows your company to pay you nominal expenses to cover the general costs you may incur.
Your employer (your own company) can currently pay you (the employee/director) £26 per month or £6 per week to cover ‘use of home’ costs. This pre-agreed sum does not have to be authorised in any way.
Refer to HMRC internal manual EIM01476 for further details. HMRC states:
“We would expect that £6 per week would be sufficient for most cases, particularly where the additional costs are only for heating and lighting the work area.”
This may seem like a paltry sum, but if you claim every month, this adds up to £312 per year. A sum which ordinarily would be subject to Corporation Tax at 19%, and then personal taxes of up to 38.1%, if extracted any other way. This fixed amount applies from April 2020 onwards. Previously it was £4/£18 per week/month.
Most limited company directors go for this simple option unless there’s a compelling reason to look at claiming proportional expenses, which we discuss next.
The benefits for claiming flat rate expenses are that no receipts are needed and as it’s a prescribed HMRC rate there is very little chance of challenge. On the downside it’s not a huge amount towards household expenses which could be substantial if you are working full time from a home office.
2. Claiming for a proportion of household expenses
As an alternative to £6 per week work from home claim, if you use your home in a meaningful way to carry out your trade, you can claim for any expenses incurred, however, you must be able to justify any claims you make.
Unlike the rules which exist for sole traders, you can only claim for the incremental costs incurred as a result of working from home.
In other words, any costs you would have borne anyway – by the very nature of running a home are excluded. As are any costs deemed to have a ‘duality of purpose’ – i.e things which have both a personal and business use – but cannot be separated.
You can calculate this by working out the cost of allowable expenses (gas, electricity and metered water) according to the number of rooms you have in your property and the amount of time you spend working in them.
However, as a limited company director, you can’t claim for any fixed costs – as you would have had to pay for these anyway; such as Council Tax, Rent and Mortgage Interest.
You can only claim for the cost of broadband and telephone bills if the contracts are your company’s name. Unless, of course, your bills can demonstrate specific amounts were incurred purely by the business.
3. A formal contract with your own company
Alternatively, you may opt for a third option – drawing up a formal rental agreement between you and your own limited company.
This must be a commercial agreement, based on your real working arrangements, and ‘market rent’ must be paid. With this in mind, it may be worth your while asking a local estate agent to provide you with a formal rent valuation.
You should take care when drafting such an agreement (clearly we recommend you seek the help of a professional), and be able to justify the amounts involved.
Although your company will receive tax relief on the rental payments, you will incur personal tax on the rent received when you fill in your annual self-assessment return. If you co-own your home, then when it comes to tax return time, the rent must be split according to the proportion of your home each person owns.
Things to bear in mind…
If you do decide to draw up a formal rental agreement between you and your limited company, you should bear these points in mind:
- Legal requirements: If you have a rental agreement or a mortgage, are you permitted to use your home for business purposes?
- Insurance policy: Would running a business from home breach the terms of your home insurance policy?
- Loss of CGT exemption: You may lose your CGT exemption when selling your property if any part of it is deemed to be exclusively for business use.
- Possibility of Business rates: There is also a small chance that your property may become liable for business rates in certain circumstances.
- Commercial terms: The amount of rent needs to be at a commercial rate
- Dedicated space: You should have a room dedicated to your business
Clearly, we strongly advise you to discuss the rent agreement option with your accountant and/or tax advisor first, as there are so various factors to consider. The agreement needs to be reasonable, and well-drafted to ensure you don’t unintentionally fall into a tax trap further down the line.
Our service to you
If you are a self employed, business owner/director of company looking to get your accountancy and taxation matters sorted, look no further. We, at Naail & Co, are pro-active and easily accessible accountants and tax advisors, who will not only ensure that all your filing obligations are up to date with Companies House and HMRC, but also you do not pay a penny more in taxes than you have to. We work on a fixed fee basis and provide same day response to all your phone and email enquiries. We will also allocate a designated accounts manager who would have better understanding of your and business financial and taxation affairs. Book a free consultation call using the link below.