Tax Allowances When Working From Home
Due to the current Coronavirus pandemic, many UK employees are expected to work from home not just during the lockdown, but perhaps for the foreseeable future. One of the benefits of working from home has always been the ability to claim certain costs as a business expense. With so many people now working remotely, there has been a rising interest around the rules of claiming back tax and the VAT implications.
There are rules to tax allowances when working from home. You’ll need to be able to prove that you regularly work from your home office space (which, during the COVID-19 pandemic is standard). If you purchase equipment that’s necessary and essentials for the business to function, you will be able to claim tax relief on that. Businesses can also claim reasonable tax relief towards the cost of furnishing home offices.
Claim Tax Relief for Setting Up a Home Office
Companies can purchase essentials they need to continue operating as staff work from home and claim back the VAT. The expenses will need to be “reasonable” (claim for what the company needs, not what the company wants) and the purchased items need to be purely for business purposes.
Examples of reasonable purchases for employees working from home are laptops, keyboards and monitors as well as stationery, desks, chairs or bookshelves.
Claiming for “Business Use Only”
This is the main rule for bills and costs a business might incur through their remote-working employees.
When a company is paying for employees’ costs they can only claim VAT if these costs are not private. For example, if your employees request to have broadband covered, they will only need to use it during working hours. Some claims will be for mixed-use (business and private) and it is acceptable to claim part of the cost back for the proportion that is being used for business purposes.
In these circumstances, it is extremely important that when an employee is incurring costs, they keep the bills and receipts to prove what was bought and whether VAT was paid or not.
Can an employee request the company to cover energy bills?
Working from home will mean that your employees’ utility bills are likely to increase - they’ll be using more electricity to power their laptops, cook lunch or have the lights on. The new government guidelines state that employers can pay £6 per week to cover these increased utility costs. This is tax-free, doesn’t need any documentation and does not need to be reported by the company.
Employees having a separate working area can claim the costs of heating and lighting for this. However, employees (and companies) cannot claim tax allowances for rent.
HMRC Flat Rate for Limited Companies
Limited companies can use two ways of working out home office expenses – using HMRC’s flat-rate amount or by creating a rental agreement.
The easiest way to calculate your business’ home office expenses is to use HMRC’s published allowance for the additional costs of running your business from home. As mentioned above, the business can claim £6 per week, which adds up to a total allowance of £312 for the whole tax year. This can be included as an allowable expense alongside anything else that is being claimed.
Renting a Home Office to the Limited Company
Business owners wishing to claim a higher amount than the £6 per week will need to set up a rental agreement between themselves (as the homeowner) and the limited company. Without a formal agreement, HMRC can classify the rent received from the limited company as additional salary, which would be subject to Tax and National Insurance.
Drawing up a rental agreement is beneficial because your limited company can deduct rental payments from your company’s pre-tax profit, meaning that Corporation Tax will not be payable on these expenses.
HMRC’s rules over tax allowances and reliefs are complex and also different for limited companies and sole traders. The tax experts at CapEx Associates can help your business navigate the application process and claim tax relief.