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Claiming Expenses for Use of Home as Office

Once upon a time, the only tax deductions for contractors that could be justified when using part of your home as an office were the additional costs incurred.  This meant that HMRC would not allow any part of your standing charges to be claimed as they argued that you would incur these whether or not you used your home for business.

This changed with the introduction of S.34 ITTOIA in 2005 which allows you to claim a reasonable proportion of an expense incurred for business purposes provided that it is identifiable.  Therefore, if you keep a log of all of your telephone calls and are able to show those that are business calls, you will be able to claim that percentage of all of your telephone calls including rental charges.  However, you would not, for example, be able to claim a percentage of your clothing costs as you would not be able to demonstrate which proportion of your business suit you wore for business purposes and which proportion for warmth and public decency.  The point to remember is that you can claim where the proportion is identifiable, not simply where it is just or reasonable. Please note that where you have a mobile telephone and the contract is in the name of your company, you can claim 100% of the cost.

This still means that for some expenses such as heat & light etc. that the identifiable amount is very small because you would have to apportion your costs based on the area of your home used for business purposes.  To make this a little easier HMRC have agreed that anyone using their home for business purposes can claim £4 per week without fear of enquiry.  The amount is clearly very small but should be claimed by every business where relevant.

Tax Deductions for Contractors and Charging your Company Rent

It is also possible for persons contracting through a contractor limited company to charge their company rent for using a room as an office.  This has proved quite popular for some businesses but there are a number of issues that need to be taken into account in order to ensure that this is not successfully challenged by HMRC. 

  • You need to be able to demonstrate that the amount you are charging your company is a market rate.  The best way to do this is to either pay for a commercial valuation or to keep a record of the rents charged for serviced offices in your area and apply the same cost per square metre to the area you use as an office.
  • HMRC would expect to see a proper rental agreement between you and your limited company and this would be best drawn up by a commercial lawyer.
  • If claiming rent the purposes of tax deductions for contractors, you must ensure that you do not use the room exclusively for business purposes and that any rental agreement does not insist on exclusive business use or you will risk losing Principle Private Residence relief on that part of the house.  This would mean paying Capital Gains Tax on that part of your house when you sold it.  The rental agreement should therefore state that the company can only use the facilities during designated hours, say 9 to 5 Monday to Friday.
  • You can then deduct the relevant proportion of all costs including mortgage, rates, insurance and other utility costs from the rent received and only the balance, if any, would be taxable on you.
  • As rent is not subject to national insurance, the company does not need to account for either Employer’s or Employee’s national insurance contributions.
  •  If you have brought forward losses in respect of a buy to let portfolio, those losses can be offset against any rents received from the company.
  • Please be aware that if the guidelines above are not followed and HMRC can show that the rent being paid is not at a market rate or there is not a formal rental agreement, HMRC can treat the rents paid as additional salary and apply both tax and national insurance.
  • Please also bear in mind that if you are in the enviable position of not having any mortgage then any rent received by you will be taxable, perhaps at 40%.  Therefore if you are in this position and do not have any buy to let losses to utilise then you must consider whether this option is for you and we will be happy to advise.

We hope this has given you some useful guidance on tax deductions for contractors, but as always if you do have any questions please don’t hesitate to contact us on 0800 954 2101 or via email at tax@freestyleaccounting.com.

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