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Every Penny Counts
Listed under: Retail Clinic
Published: Wednesday, February 24, 2010
Are you missing out on the tax relief you're entitled to for running your business from home? Not sure? Expert Steve Willis has the answers
“Many home-based business owners fail to claim the full tax relief they are entitled to, either because they are uncertain what they can claim for, or due to the fact that they don't know how to correctly calculate the necessary apportionment.
What can you claim for?
The most obvious and allowable costs are those for heating and lighting, however, there are a number of expenses that are often forgotten, including the cost of council tax, mortgage interest and insurance.
The area of the home most likely to be used for business is the spare room; typically a bedroom or dining room which has been converted into a studio, workshop or office. In a situation like this, the costs that can be claimed for include electricity, gas, heating, repairs, re-decorating, insurance, council tax, rent and mortgage interest. Unfortunately, water costs are unlikely to be accepted, unless heavy usage can be justified, for example in a hairdressers or dyers.
The Duality Fault
In the past, the HMRC would deny claims for expenses that included an element of private benefit, such as motoring costs for a supplier who purchased stock for the business and then went on to do domestic shopping during the same journey. Such expenses were referred to as being of ‘dual purpose’ and therefore not considered to be “wholly and exclusively for the trade,” as HMRC interpreted the law required.
However, subsequent court rulings have forced the HMRC to modify its definition of the dual purpose bar and in 2007 it issued a series of notices informing business owners that it would now accept claims for expenses coupled with a private element, providing the business portion had been correctly and accurately apportioned.
Apportionment
There are three factors that need to be addressed when calculating the relief business owners are entitled to. First and foremost, the space being used must be accurately identified and measured, either by calculating it as a fraction of the number of rooms in the house, or through measuring the area of the room itself and making it a fraction of the total area of the property. For example a house with five rooms where only one bedroom was used, would be 1/5.
The time that the space is used will also need to be quantified and apportioned between business and domestic use. This is done through evaluating how long the room is used for work and making it a fraction of the total time the area is used. So, a room that is used as an office six hours a day, but for personal entertainment for four, would be written as 6/10 for business, and 4/10 for domestic.
Retailers can then use these figures to calculate how much they are able to claim for running their businesses from home.
If the person above lived in a house with 10 bedrooms, for example, and their total bills came to £5,700, they would calculate their claim by multiplying this cost by the fraction of rooms being used (1/10) and the time they are used for (6/10) – meaning the individual above would be able to claim £285 for running their business from home.
Final thoughts
If retailers have not claimed back these costs previously, they are allowed to go back four years and have their tax assessments amended, however, the HMRC is very sensitive about reasonableness when it comes to apportionment, so businesses must not be greedy. If the tax inspector thinks a claimant is pushing his or her luck, he will not respond in kind.”
Steve Willis is the author of the book Tax Relief for Business Use of the Home, which covers the above in greater detail and includes a free spreadsheet apportionment calculator. For more information, please visit http://www.bizguides.co.uk
What can you claim for?
The most obvious and allowable costs are those for heating and lighting, however, there are a number of expenses that are often forgotten, including the cost of council tax, mortgage interest and insurance.
The area of the home most likely to be used for business is the spare room; typically a bedroom or dining room which has been converted into a studio, workshop or office. In a situation like this, the costs that can be claimed for include electricity, gas, heating, repairs, re-decorating, insurance, council tax, rent and mortgage interest. Unfortunately, water costs are unlikely to be accepted, unless heavy usage can be justified, for example in a hairdressers or dyers.
The Duality Fault
In the past, the HMRC would deny claims for expenses that included an element of private benefit, such as motoring costs for a supplier who purchased stock for the business and then went on to do domestic shopping during the same journey. Such expenses were referred to as being of ‘dual purpose’ and therefore not considered to be “wholly and exclusively for the trade,” as HMRC interpreted the law required.
However, subsequent court rulings have forced the HMRC to modify its definition of the dual purpose bar and in 2007 it issued a series of notices informing business owners that it would now accept claims for expenses coupled with a private element, providing the business portion had been correctly and accurately apportioned.
Apportionment
There are three factors that need to be addressed when calculating the relief business owners are entitled to. First and foremost, the space being used must be accurately identified and measured, either by calculating it as a fraction of the number of rooms in the house, or through measuring the area of the room itself and making it a fraction of the total area of the property. For example a house with five rooms where only one bedroom was used, would be 1/5.
The time that the space is used will also need to be quantified and apportioned between business and domestic use. This is done through evaluating how long the room is used for work and making it a fraction of the total time the area is used. So, a room that is used as an office six hours a day, but for personal entertainment for four, would be written as 6/10 for business, and 4/10 for domestic.
Retailers can then use these figures to calculate how much they are able to claim for running their businesses from home.
If the person above lived in a house with 10 bedrooms, for example, and their total bills came to £5,700, they would calculate their claim by multiplying this cost by the fraction of rooms being used (1/10) and the time they are used for (6/10) – meaning the individual above would be able to claim £285 for running their business from home.
Final thoughts
If retailers have not claimed back these costs previously, they are allowed to go back four years and have their tax assessments amended, however, the HMRC is very sensitive about reasonableness when it comes to apportionment, so businesses must not be greedy. If the tax inspector thinks a claimant is pushing his or her luck, he will not respond in kind.”
Steve Willis is the author of the book Tax Relief for Business Use of the Home, which covers the above in greater detail and includes a free spreadsheet apportionment calculator. For more information, please visit http://www.bizguides.co.uk
