What allowable expenses can you claim when you’re self employed and work from home?

The coronavirus pandemic has meant many more of us have experienced working from home in recent years, but it’s nothing new for many self-employed people (ie sole traders) who run home-based businesses. According to the most…

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The coronavirus pandemic has meant many more of us have experienced working from home in recent years, but it’s nothing new for many self-employed people (ie sole traders) who run home-based businesses.

According to the most recent government estimates, there are 2.9m home-based businesses in the UK and they contribute £300bn to the economy. Reportedly, about 70% of all new UK businesses are started from the owner’s home and while some move to premises post-launch, others remain strictly home-based.

Advantages of running a home-based business

Running a home-based business can give you much greater flexibility, which really helps if you have children or other care commitments. And no longer having to commute could save you lots of time, money and hassle.

But the biggest advantage of using your home as a base is starting and running your business will be much cheaper, while helping you to save money on domestic bills. When you’re a sole trader running a home-based business, you need to claim your full allowable expenses, as it will minimise your Income Tax bill. So, here are 20 facts about allowable expenses that you really should know…

What allowable expenses can you claim?

1 If you make less than £1,000 in a year and don’t pay tax because you use your trading allowance, you cannot claim any allowable expenses.

2 If you earn more than £1,000, you can minimise you tax bill by claiming business costs as “allowable expenses” in your annual Self Assessment tax return.

3 Such allowable expenses must be generated “wholly and exclusively” for business purposes. Personal expenses are not allowable.

4 If you use something for business and personal reasons (eg your mobile phone), you can only claim allowable expenses for business use.

5 Even if you mostly operate remotely, for example, by delivering a service at customers’ homes, you can still claim allowable expenses for having an office in your home.

6 As you might expect, you can claim for business use of your landline telephone and broadband. You can also claim for business stationery.

7 You can claim for an appropriate proportion of your domestic electricity and heating bills when running a business from your home.

8 Some of your water costs can be claimed as an allowable expense, but only if the nature of your business or trade means you’re using more water. An example could be running a vehicle-valeting business. Using slightly more water because you work from home does not enable you to claim some of your water bills as an allowable expense.

What about mortgage, rent, council tax and repairs?

9 If you’re paying a mortgage on your home, you can claim a proportion of your mortgage interest payments – not the mortgage capital repayment.

10 If you’re paying rent to a landlord, you can claim a fitting proportion. Sole traders who own or are buying their own home with a mortgage cannot rent a room to their business.

11 Some Council Tax can be claimed if you use a small part of your home for your business. Business rates are payable if, for example, you sell products or services to visitors to your property or you’ve converted your garage into a gym for paying customers.

12 You can claim for full repairs to the room in which you run your business, as well as a proportion of “whole-house” repairs (eg if you have your roof fixed). You can’t claim anything for having a bathroom or kitchen repaired.

How to work out allowable expenses

13 You can work out your allowable expenses as a home-based sole trader business either by: finding out the actual or estimated cost of each allowable expense; or using simplified expenses to claim a flat rate.

14 Finding out some allowable expenses is easy, if you have a receipt, invoice or credit card/bank account statement. In other cases, you’ll have to make informed estimates.

15 If you use something for work and business, for example, your mobile phone, you must work out your business use.

  • For example: If your yearly bill for mobile phone calls is £240 and you use your phone for business roughly a third of the time, you can claim £80 as an allowable expense. If business calls make up about half of your total use, you can claim £120 as an allowable expense.

16 For utility bills, people usually claim allowable expenses for use of one room for business. So, if you live in a house with five rooms and one is set up as an office, you would claim for a fifth of each bill.

  • For example: If your total electricity is £600 for the year, you could claim £120 as an allowable expense. If your yearly Council Tax bill is £1,800, you may claim an allowable expense of £360.

Should you claim a flat rate via simplified expenses?

17 Your other option is to use a flat rate to calculate your simplified allowable expenses, which can save time and effort. However, you should work out whether claiming a flat rate covers your actual business expenses.

18 The flat rate does not include telephone or broadband expenses, so you can claim the business use proportion of the actual total costs.

19 You can only use simplified expenses if you work 25 hours or more a month from home. These are the rates:

  • If you work between 25 and 50 hours a month, you can claim a flat rate of £10 per month (£120 a year).
  • If you work between 51 and 100 hours a month, you can claim a flat rate of £18 per month (£216 a year).
  • If you work 101 hours or more a month, you can claim a flat rate of £26 per month (£312 a year).

20 Government website GOV.UK features a simplified expenses checker so you can compare what you can claim using simplified expenses against actual costs.

If you’re in any doubt about what you can claim as allowable expenses when running a sole trader business from your home, speak to a professional tax adviser. It could save you a lot of money.

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