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Business Services  •  Business Tax  •  Personal tax  •  Property  •  Small Business  •  Taxation

A home office can be a very tax efficient strategy for business owners

By RJP LLP on 29 September, 2010
At RJP, we find that increasingly small business owners choose either to work from home on certain days, or entirely base their businesses from home.  For many, the cost of ‘proper’ offices cannot be justified in the current climate and advances in technology make it very straightforward to operate a virtual business.  Ultimately, most small business owners tend to travel to clients’ premises for meetings anyway, making the traditional notion of having an office redundant.

Claiming tax deductable expenses for working at home was always a grey area until HMRC introduced the concept of ‘fixed costs’ as part of its attempt to clarify the law for the self employed who worked from home. Fixed costs cover mortgage interest, council tax or insurance premiums on the property and a certain percentage of this expenditure can be offset against the income of the business provided certain conditions are met.  In addition to this, other costs for consumables (like light, heat or power) can also be offset proportionally against turnover as tax deductable expenses. This practice of claiming expenses in this way is only relevant for the self employed – sole traders and partnerships.
But what about those running a limited company?
It is also possible for such business owners to use their homes to provide a tax efficient office space by ‘renting’ themselves a room.  In this case, they re-charge the costs of renting the office space rather than simply claiming back what HMRC classify as fixed costs, by effectively charging their company rent for the use of their home.
If you would like to operate in this way, it is best done by way of a rental agreement between yourself as an individual and the company, which grants the company non-exclusive use of the required number of rooms in the house. The non-exclusivity enables the individual and his family to continue to use those rooms for private purposes and also of course, ensures that there are no capital gains tax issues when the property is sold.
The strategy is tax efficient because the company is able to claim a corporation tax deduction for rent paid provided those rents are paid on a commercial basis and are at normal market rates – usually ascertained by researching local serviced office rates.
From a tax perspective, the individual must pay income tax on the rental income received but is able to deduct expenses such as the proportionate amounts of mortgage interest, insurance, rates, gas, electricity etc. This strategy is particularly beneficial for business owners who also have buy-to-let property investments as losses on the buy-to-let properties can be offset against this rental income.

Worked 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.
Paul Webb is a tax partner at Robert James Partnership the Surrey based small business tax and accountancy specialists.

To find out more about tax planning strategies visit www.rjp.co.uk or contact Paul Webb directly at pw@rjp.co.uk

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31 December 2020 - Review disposals of chargeable assets to avoid a possible CGT increase

Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.