We discuss what working from home expenses you can claim as a limited company director and what the tax implications are.
Working from home is an appealing option from many – and that number has grown with forced flexible working due to Covid-19. As a company director, you’ll need to decide if this works for you – including what expenses you can claim and the tax implications.
To claim through your limited company there are three main options: the simpler HMRC guideline rate; claiming for additional household costs; or a rental agreement between you and your company.
Whichever option you choose, if you’re a homeowner and have a room/garage exclusively for business use, this could mean you have to pay HMRC capital gains tax if you come to sell your house. Making sure rooms have a dual purpose such as an office/guest bedroom or office/music room can alleviate this.
If you would like to discuss your individual circumstances further then please feel free to get in touch.
HMRC guideline rate for working from home expenses
The HMRC guideline rate is a flat rate of £6 a week (from April 2020, £4 a week previously) to pay towards general additional household expenditures that come as a result of working from home, such as the costs of heating and lighting. No records are needed to be kept for this, nor evidence produced, so it’s easy to claim.
If you make the most of the HMRC guideline rate for working from home by claiming every week, this adds up to £312 a year. For the individual, this would class as tax-free and for the limited company, this would be an allowable expense for corporation tax purposes.
This allowance is towards household costs and doesn’t include internet and phone bills. To claim the full amount for these, the contracts would need to be in the company name unless you can specifically identify the business element – see next section.
Claiming for additional household costs
Sums greater than £6 a week can be claimed if you can provide HMRC with evidence of the additional costs. For example, if you can show an incremental increase on your electricity bill or the costs of business calls on the phone line.
You cannot claim for costs that have both business and personal elements that cannot be separated – for example council tax or a broadband tariff that’s for personal and business use. To receive reimbursement of the additional costs, you will need to keep evidence and records.
An alternative method is to set up a scale rate payment. This is where an amount is calculated to reimburse the average additional household expenses. Evidence on how this is calculated is required initially but going forward, you will not need to check every bill – just a sample.
These reimbursed household costs are an allowable expense for your company and come as a tax-free payment to the director.
Rental agreement between you and your limited company
Setting up a rental agreement between you and your own limited company is another option to ensure you don’t lose out when paying for essential business expenses. This is where your limited company rents office space from you, the individual.
This will need to be a formal commercial rental agreement between you and your limited company and the rent charged should be a realistic market rate. This agreement can also include allowable business household costs such as utility bills and council tax. You need to be able to justify the amounts and the agreement should be reviewed periodically.
This will be an allowable expense for the limited company, however, the individual will need to class the rent received as income on their self-assessment and pay tax accordingly. If the property is joint-owned, this will need to be split accordingly.
At Lava Sky Accounting we have wide-ranging industry experience and understanding of limited companies, meaning we can take care of your accounts while you concentrate on running your business. Get in touch today to find out more.