August 10, 2021

Article

Tax relief is available for certain costs which might be incurred personally by a partner in a partnership, LLP, or a sole trader, as a result of carrying out some of the activities of their business from their home. Different rules apply for employees and directors of limited companies, which are not addressed here. Follow the steps below to establish whether any particular expense might qualify.

The General Position

Step 1 – Are the expenses incurred wholly and exclusively for the purpose of the business?

Step 2 – Are the expenses capital expenses or revenue expenses?

Step 3 – Are the expenses specifically disallowed?

If expenses are for business purposes, of a revenue nature, and not specifically disallowed they may be deducted from the business profits for tax purposes. Capital expenses may attract capital allowances (see more details below), which are deducted from business profits for tax purposes.

Step 1 - Business expenses

The ‘wholly and exclusively’ test at first seems to be a big limitation. Any expenses which have a private element would at first seem to be excluded. For example, you may need medical treatment in order to be able to work, maybe even as a result of an injury occurring as a result of your work. Being fit and healthy is a private cost, although clearly it is essential for the business also. The duality of purpose means that this kind of expense does not qualify.

However, where an expense can be apportioned between business and private use, the business element can be claimed. Typically, in the context of working from home these will include.

  • lighting and heating a home office,
  • additional insurance costs,
  • additional internet connection and telephone costs,
  • repairs and decoration of a home office
  • council tax
  • mortgage interest
  • rent

The basis of apportionment is not prescribed but must be ‘just and reasonable’. Apportionment of costs might be by floor area, for example. HMRC guidance gives a simple example of using the number of rooms in the house, but that is perhaps too simplistic. The apportionment should also take account of how much time you spend working in the home office, unless it is a dedicated separate room, not used for private purposes.

As an alternative to having to make these calculations HMRC will accept a claim based on the number of hours worked at home using the following rates:

Hours of business use per month

Flat rate per month

25 to 50

£10

51 to 100

£18

101 and more

£26

Business use of home phones and internet expenses can be claimed in addition to this flat rate.

Step 2 – Capital expenses

Capital expenses cannot be deducted from business profits, but tax relief can be available via capital allowances as explained below.

An expense is capital, broadly, if it relates to a tangible asset which has a useful life of over 12 months. For example, a printer is a capital item as it will last over a year, but the paper and ink it uses is a revenue cost as these are consumable items.

Capital items which are ‘plant and machinery’ qualify for capital allowances. At the moment it is likely that these will attract 100% deduction as part of the business annual investment allowance. An explanation of capital allowances is beyond the scope of this note.

The cost of constructing an office or building work to adapt your home to create an office, are also capital expenses. In this case the asset is unlikely to be ‘plant and machinery’ and will not generally qualify for capital allowances. There are allowances for ‘integral features’ in a building (e.g., electrical wiring, heating systems, etc.) and Structures and Buildings Allowances may provide limited relief in some cases.

The cost of repayment of a loan or mortgage is a capital cost and not allowed, although any interest may be a revenue cost and therefore allowable.

Step 3 – disallowed expenses

Certain costs are disallowed for tax relief by statute even though they may qualify under general principles.

The most common disallowance will be any costs and assets which are incurred for any form of business entertaining including gifts. Other common disallowances would include any kind of fine or penalty and any costs associated with such fines.

Administration

In order for partners in a partnership or LLP to obtain relief for any of these items the claim must be made through the partnership tax return and may not be claimed through the individual’s personal self-assessment tax return. The partnership return will be adjusted to ensure that only the partner incurring the expense benefits from the tax relief.

Unless you are using the flat rates described above, you must retain evidence to justify your claim in case HMRC should enquire into it. Invoices or records of payments need to be retained together with the basis for any apportionment of costs. HMRC guidance recommends that you keep a record of the times and dates when you are working from home. Please let us have a copy of your calculations to support any claim to be included in the partnership return.

This summary has been prepared for general information purposes only. For further information or advice on the application of this guidance in any particular circumstance please contact Andrew.Law@albertgoodman.co.uk

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