Working from Home: Financial and Taxation Implication

One of the most expensive overhead costs of setting up a new business relates to premises. Many businesses take the view that rather than having a dedicated business premises they start up using their home as an office.

Costs of working from home are calculated to a formula which is an acceptable deductible expense for HMRC tax purposes. Before trading from home you must advise your mortgage company/landlord and obtain their agreement together with your insurance company.

The deductible cost of working from home is usually dealt in one of two ways. Firstly, there is the business flat rate method where you can charge an agreed sum per month as detailed in an HMRC table. This will depend on the number of hours worked from home. Secondly, is to total the number of rooms in the property (excluding common walkways) and express as a percentage the number of rooms used for business and apply this to the total business expenses. When assessing the number of rooms used for business purposes remember a dedicated business room can have a dual purpose and this needs to be taken into account when considering the chargeable percentage.

Accepted expenses with a business element are Council Tax, Gas and Electricity, Rent and Mortgage interest and communication costs. These are totalled up annually. HMRC will then review your apportionment expenses to ensure that they are split on a fair and reasonable basis.

An important factor that any business must consider is the credibility factor and how they are perceived by customers and suppliers when considering using their home as an office. Cost saving is a real issue but means little or nothing if the business is not accepted as trustworthy.

Using any part of your home as an office could give rise to future tax consequences. As a general rule when you dispose of your principal private residence it is exempt from capital gains tax. If part has been used for business purposes this may not be the case.

You should take professional advice before taking action based on the above. For more information visit HMRC.