Can You Claim for a Home Office to Save Tax

The pandemic has brought with it a significant change in work culture. The concept of a "home office" is more relevant than ever. Whether you're an employee adapting to working from home, or an entrepreneur running a side hustle, you might be wondering: "can you claim for a home office to save tax? 

The blog post dives into two main themes: 

1. How to claim the use of your home as an office 

2. The tax implications of building a garden office

Check out our straightforward guide below, written by a Chartered Accountant and designed for UK side hustlers, breaking down the essentials of how to claim a home for tax purposes.

table of contents

• How to claim the use of your home as an office
• Eligibility Criteria for Claiming
• Calculation Methods
• Simplified Expenses Method
• Actual Costs Method
• Documentation Requirements
• Errors to Avoid
• Building a Garden Office
• Corporation Tax Relief
• Capital allowances
• Value Added Tax (VAT)
• Benefit in kind (BIK)
• Business rates
• Capital gains tax (CGT)
• Other Considerations
• Other Options
• FAQs
• Final Thoughts
• Article Sources
  

Working from home gives you the opportunity to claim your home as an office and save some money on taxes. 

In this section we will explore the specifics of claiming your home as a workspace with an emphasis on the two primary calculation methods (the Simplified Expenses method and the Actual Costs method).

Before diving into the details it's essential to determine if you meet the requirements for claiming these expenses. According to HM Revenue & Customs (HMRC), the space you designate as your "home office" should be used predominantly or exclusively for business activities. Additionally it should serve as your work location. Occasional or sporadic use may not qualify you for deductions.

Expenses That May Qualify for Deduction

Expenses you can potentially claim for working from home include;

Mortgage Interest or Rent

You may deduct a portion of your mortgage interest or rent based on the area dedicated specifically to business purposes.

Utilities

This includes expenses such, as gas, electricity, water and broadband internet.

Council Tax

You can claim a portion of your council tax if you use your business area for work purposes well.

Phone Bills

If you use your home landline, for business you can claim a part of the cost associated with it.

Cleaning

You can also claim the expenses incurred for cleaning your workspace.

Remember that these expenses should be proportional to the area of your home that is exclusively used for business activities.

The first method is called the Simplified Expenses method (also called the flat rate method). This method aims to make the entire process less burdensome. HMRC provides fixed (flat) rates for individuals who work from home which vary based on the number of hours worked per month. These fixed rates cover utility costs, and are not intended to include mortgage interest, rent or council tax. 

The tiers are as follows;

25–50 hours; £10 per month

51–100 hours; £18 per month

101 hours or more; £26 per month

Advantages

• Simplifies record keeping making it less overwhelming for those who're not familiar with accounting.
• Saves time and effort required in calculating costs.

Disadvantages

• There is a possibility that you may end up claiming less than what you're entitled to.
  

The second method is called the Actual Costs method. The principle behind the actual costs method for claiming home office expenses is to reflect the real costs incurred in the use of the home for business purposes.

With this approach it's important to keep a record of all the expenses related to your home throughout the tax year. Once you have this information you'll need to determine the proportion of your home that is used for business purposes. 

To illustrate this lets consider an example;

Calculating Area

Lets say your home has a floor area of 100 metres in total and your home office occupies 10 square metres. In this case 10% of your home is designated for business use. However, if you only use that space for four hours a day, then you can't generally claim the full 10% of home expenses like utilities, mortgage interest, or rent. Instead, you would need to prorate the expenses based on the actual usage to arrive at a reasonable amount to claim.

For example, if you work for 4 hours a day in the 10-square-meter room, and let's say the home is occupied for 16 waking hours, you would further adjust the 10% figure by the fraction of time used for business.

(4 hour for business use/16 total waking hours)×10

This would mean you could claim roughly 2.5% (1/4 of 10%) of utility bills, mortgage interest, and other relevant expenses.

Proportionate Expenses

If your annual utility bills amount to £2,000 you can claim £50 (which is 2.5% of £2,000) as business expenses.

Advantages

• Provides a representation of the costs incurred.
• Offers the potential for higher deductions.

Disadvantages

• Requires record keeping which can be time consuming.
• Might necessitate assistance leading to additional costs.
  

For Simplified Expenses it's important to keep track of the hours worked from home.

For the Actual Costs Method, you'll need to hold onto bills and mortgage statements while also having a floor plan that indicates the area utilised for business purposes.

Key Takeaway

Regardless of which method you choose, maintaining records is crucial.

Avoiding Overstating Expenses

It's crucial to claim the portion of your expenses that is directly related to your business. For example if you use your broadband for business purposes make sure to only claim the part that is attributable to your work.

Insufficient Documentation

It is important to maintain records whether it's utility bills or a rental agreement.

Neglecting Changes

If you move to another room in your home make sure to adjust your calculations 

Working from home has its own set of perks and challenges. While a home office is convenient, it may lack the professional setting you desire. Enter the garden office—a separate, dedicated space within your property that allows you to focus solely on work. 

For company directors (those trading via their own limited company), the idea of having a garden office funded by their company is enticing, but it also comes with an intricate set of tax implications. If a company decides to invest in a garden office for its director, it should take into account the impact of the following taxes and allowances.

If the garden office is used for business purposes the company can cover the cost. However it's important to note that HMRC considers the building cost as a capital expense rather than a revenue expense. This means that no corporation tax deduction can be claimed for it as it is expected to be used for a long-term period and provide benefits to the business. Therefore immediate tax relief is not applicable in this case. 

Although a garden office is technically movable it is regarded as a structure from which your business operates, rather than equipment. As a result, none of the costs associated with constructing your garden office or purchasing a ready made one can be deducted from your business profits. This includes expenses related to design and planning and actual construction and initial decoration costs.

However running costs such as heating and lighting are tax deductible. Additionally if water supply is separately metered from your home and you have water rates, those expenses are also eligible for deduction from your profits. 

Finally any repairs or redecoration costs incurred are also considered tax deductible.

Capital allowances are a way for businesses to receive tax relief on the costs of acquiring lasting (long-term) assets. Plant and machinery assets generally qualify for these allowances. If you purchase an asset that meets the criteria for the Annual Investment Allowance (AIA), you can claim 100% of its cost in the year long as it is within the annual limit. However it's important to note that not all assets are eligible, for AIA.

Structures and buildings 

Structures and buildings fall into a category of assets that don't qualify for capital allowances because they are not considered plant and machinery. Instead they are seen as the locations where a business operates. This means that office costs cannot be claimed under capital allowances.

Additionally if you have a garden office you won't be able to benefit from the Structures & Buildings Allowance (SBA) because this allowance doesn't apply to properties or structures used for dwelling purposes. Even if you argue that your garden office will be used only for business, there is a risk that HMRC may challenge your claim based on their belief that you intended to use it as a personal residence.

To utilise this allowance you will need to purchase or lease a piece of land where the structure will be installed. This may lead to Stamp Duty Land Tax (SDLT) implications and other legal considerations beyond the scope of this article.

The good news however, is that tax relief, through capital allowances can be claimed for fixtures and fittings. This means you can potentially recover costs for items like furniture, curtains, shelves, etc. In addition, expenses related to power installation such as wiring, light fittings and heating also qualify for tax relief. Even thermal insulation qualifies, for this benefit despite being part of the construction.

Value Added Tax (VAT) can significantly impact your building costs. If the building structure or furniture/furnishings are exclusively used for business purposes you can potentially reclaim input VAT incurred on those expenses. However, if you are a director of a company and using the accommodation personally, i.e. where a room is utilised for both business and private use, only the business portion of VAT can be reclaimed based on a reasonable allocation method. 

It’s important to note that no individual working from home, for example an employee, can recover the VAT expenses by constructing a home office and bearing all the costs. VAT can also only be reclaimed by a business that is registered for VAT.

If you sell your primary residence you're entitled to a full tax exemption called Principal Private Residence Relief (PPR). This means you won't have to pay Capital Gains Tax (CGT) on any gains from the sale.

However if part of your home is used exclusively for business purposes the relief may be limited. In cases when you sell the property you'll need to divide the gain reasonably. Only the portion used as an office will be subject to CGT.

It's worth noting that if you use your garden office for personal reasons it could trigger a BIK charge.

Keep in mind that the type of garden office you construct can also affect your CGT obligations. If its a structure that can be easily dismantled and relocated elsewhere there shouldn't be any CGT concerns. On the hand if its permanently installed and will be sold together with your residence its value may need to be assessed separately. Any increase in value would then become subject to CGT. Additionally don't forget that you can use your annual capital gains allowance to offset any gains, from the sale.

When setting up a home office it's important to consider how it might impact the availability of Principal Private Residence (PPR) for any gains resulting from selling your house.

There are also other factors to take into account when deciding to build a garden office.

Insurance

Constructing a garden office could affect your home insurance. It is advisable to inform your insurance company about your plans before proceeding.

Planning permission

Depending on the nature and type of business you may need planning permission to operate from your home. It is recommended that you seek advice from your local authority. 

Mortgage

Building an office in your garden or using a section of your home for business purposes may have implications for your mortgage. It's essential to inform your lender about your intentions.

Rent the office space back to your company

Building a garden office and financing it through a company can be appealing. However, it comes with its own complexities (covered above).

Another option is personally funding the construction. You can then rent the office space back to the company.

Before proceeding with any option, it is recommended to seek professional advice from a Chartered Accountant. 

HMRC Flat Rate for Limited Company Directors

As a company director, you can also use HMRC’s published allowance for using your home as an office. For the tax year 2023/24 you can claim £6 per week. The good news is you won’t need to keep receipts to prove your expenses for working from home. 

✅ Read our comprehensive guide on side hustles and your tax obligations.

Navigating the world of tax regulations can be overwhelming especially when you're balancing a job or managing a side hustle from your home office.

However it's crucial to understand the tax implications so you can make decisions and maximise your benefits. There are calculation methods to consider such, as the simplified expenses and actual costs method, as well as important details like Corporation Tax, VAT and Capital Gains Tax for garden offices. All these factors play a role in determining how taxes work.

The main point to remember is that your home office or garden office offers more than a workspace. It can also provide financial advantages that reduce your tax liability. However it's essential to follow the rules and guidelines set by HMRC. Calculations often require attention to detail so consulting with a tax professional is highly recommended.

As remote work and home offices become increasingly common, now is a time to familiarise yourself with the tax benefits that may be available to you.

Don't forget, no matter if you work as a freelancer, a side hustler or hold a position as a company director there are various opportunities for you to claim for a home office to save tax.

https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home

https://www.gov.uk/expenses-if-youre-self-employed

https://www.gov.uk/tax-relief-for-employees/working-at-home