Business News
Working from home: The most tax efficient way to run your business?
As increasing amounts of entrepreneurs choose to work from home on certain days of the week, or in some cases, relocate their entire business to a space in their house, we take a look at the benefits of working from home.
For many small businesses, the current economic climate has meant that the cost of ‘proper offices’ cannot be justified or are simply not affordable. With advances in technology and the increase in cheap internet and telephone packages, it is becoming easier to operate a virtual business from your own home, with many sole traders or small business owners starting up at home or moving back to avoid unnecessary costs.
Claiming tax deductible expenses for working from home has always been a grey area until the HM Revenue and Customs (HMRC) introduced the concept of ‘fixed costs’ as part of its attempt to shed greater light on this previously dark corner of the tax rules.
Fixed costs are classed as mortgage interest and council tax or insurance on the property. A certain percentage of these costs can be offset against the income of the business provided that certain rules are met.
In addition to this, costs for consumables and energy, such as light, heat and power, can also be offset against turnover as tax deductible expenses. This method of claiming expenses is only relevant for those who are self-employed, sole traders or partnerships.
But what about those running a limited company?
It is also possible for people who own or run a limited company to use their homes to provide a tax efficient office space by essentially ‘renting’ a portion of the property to their business.
This is best done by agreement between yourself as an individual and the company, granting the company non-exclusive use of the required space in your home. This non-exclusivity enables the individual and their family to continue to use the rooms as they would normally within their home, but ensures there are no capital gains tax issues if they choose to sell the house in the future.
Massively tax efficient, this strategy effectively enables the company to claim a corporation tax deduction on rent, providing they are at normal market rates and you are not over-charging.
From a tax perspective, the individual must pay income tax on the rental income, as they would if they had a lodger or tenant, but is able to deduct expenses such as mortgage interest, insurance, gas, etc.
This way of working can be particularly beneficial for business owners who also have buy-to-let property investments, as potential losses on the investments can be offset against the rental income from their own home.
A working example:
The example below explains how this useful legislation works in practice to reduce the corporation tax payable by eligible small business owners:
Michael is an architect and has a room at home that is used as dedicated office space during business hours. To rent an office of equivalent footage locally would cost in the region of £6,000 each year and so, Michael's company pays a monthly inclusive rental charge of £500 to cover the cost of renting his business premises. Michael also has a buy-to-let property portfolio that makes a loss of £5,500 each year.
After completing his accounts, Michael has made a small rental profit of £5,000 through renting himself business premises that can be entirely offset against his property investments, thus reducing his corporation tax liability.
