The UK has seen a rise in freelancing in recent years, driven in part by a shift towards the so-called “gig economy” – a new frontier of self-employment driven by businesses such as Uber and Airbnb, as well as digital marketplaces like Etsy and eBay.
So, if you’re one of the 9.6 million freelancers that the Association of Independent Professionals and the Self-Employed (IPSE) estimates are currently working in the EU – or if you’re thinking of making a move into freelancing – it’s important to remember that there’s a huge range of tax rules and regulations to adhere to.
One of the biggest areas where freelancers make mistakes in their accounts is working out which of the running costs of their property are applicable for tax relief, and how much they can claim if they do any of their work from home. Here Emily Coltman FCA, Chief Accountant to FreeAgent – which provides cloud accounting software for freelancers, micro-businesses and their accountants – gives her top tips for claiming your business use of home if you work as a sole trader.
Which method to choose?
Before exploring the individual costs you can claim, let’s look at the two potential methods for actually calculating the business use of home.
1) Flat-rate method
If you’re a sole trader or in a partnership where all the partners are individuals rather than corporate bodies, and if your sales are below the VAT threshold (which is currently £85,000 per year), then you’re eligible to use the simplified accounting method. This method allows a flat rate calculation for some of your business use of home.
To use this flat rate calculation, you look at how many hours a month on average you spend running your business at home, and then include a fixed amount in your accounts to cover your overall business use of home.
The amount that you can claim varies with the number of hours per month you work at home, as follows:
This method covers only your gas and electricity, so you’ll need to use the actual cost method for the rest of your costs – don’t leave those out!
2) Actual costs method
The alternative method is to claim for part of the actual running costs of this property in your accounts. HMRC don’t give exact guidance on how to do this: they only say that you need to apportion the running costs of your home on a “fair and reasonable” basis between the private element of that cost (ie, the part that relates to you actually living there) and the business element.
In my experience, I’ve found the best method is to work out how many rooms you have in your home, identify how many of those rooms you use for your work, then calculate exactly how much time you actually use these rooms for business.
For example, if there are 10 rooms in your home and you only use one for business purposes – and 90% of the total use of that room is for business – you would add up all the costs you can can claim, and multiply that by 1/10 and then by 90%, to get the total accounts figure for the business use of my home.
However, remember that it’s not a good idea to use any part of your home solely for business activities all the time and never use it for any private activities. That’s because capital gains tax will then be due on the part you use just for business if, and when, you sell your home. Instead, try to make sure that your work space serves a dual purpose.
What can you claim?
Armed with these methods for calculating your business use of home, let’s look at a few of the expenses you can actually include in your accounts.
If you’re buying your home through a mortgage, you can only claim a proportion of the interest you pay – not the capital repayment.
You can’t charge your business rent when you’re self-employed, because legally you are the business. But if you’re renting your home from a landlord, then you can claim a proportion of the rent for your business.
HMRC allows you to claim a proportion of your council tax. However, depending on how much you use your home for business, it’s important to remember that you may actually have to pay business rates rather than council tax.
Telephone and broadband
Remember that what you can claim for your telephone and broadband is not apportioned on the basis of the number of rooms in your home, but on what your actual usage of the line is.
You can claim the full cost of all your business use of the line and a percentage of the line rental, based on how much you use it for business purposes and how much is for personal use.
Light and heat
You can claim the business proportion of your gas and electricity costs for lighting and heating in the room(s) you use for business. Remember, if you’re claiming the flat rate allowance, leave this out because the allowance covers it.
If a property repair relates solely to the part that’s used for business, you would include this cost in your accounts in full, subject to the business use of that room. That means:
In the 10-room house, if the window in the room you use for work was repaired and that cost £200, you wouldn’t need to divide that by 10 (the total number of rooms), because the repair was only for that particular room. You’d only have to multiply it by 90% (as you use the room 90% of the time for work) and include £180 in your accounts.
If the repair was to the whole house, for example if the roof needs fixed, you can include that in the same proportion as you would the rent or council tax – so in the example of the 10-room house, the repair cost x 1/10 x 90%.
If the repair is just for a part of the house that’s not used for business – such as a kitchen floor – then you can’t claim any part of that repair in your business accounts.
Unless you use a significant amount of your home water supply for business purposes – at which point you’d need to apply to the water company for your business use to be separately charged so you can claim the full cost – you won’t be able to include minor water usage in your accounts.
For more help, check out Freeagent.com’s infographic about claiming working from home expenses for sole traders. However, if your business is a limited company – or if you’re thinking of changing to this structure in the future – bear in mind that the rules are slightly different, so check out Freeagent.com’s other infographic specifically for limited company directors.
Remember that claiming costs of working at home is not as simple as it initially sounds – so if you’re in any doubt as to what you can claim, you should seek further advice from an accountant.