PRIME Initiative

If you use part of your home for business you can claim part of the cost as a tax deduction. But how much should you claim - and if you claim too much will you end up having to pay business rates?

You can find out from the horse’s mouth in the Business Income Manual on HM Revenue & Customs’ site. Here you can read the notes used by HMRC’s own staff to help them judge what to accept as “reasonable”.

The basic policy on home offices / workshops is set out at section BIM47815 of the manual. The good news is that the rules have recently been relaxed. Since the 6th April those working from home on a limited basis no longer need to provide records of every business expense to make a tax claim.

Instead you can make on estimate of how much of your home costs can be apportioned to your business based on the following principles.

Area: what proportion in terms of area of the home is used for business purposes?
Usage: how much electricity, gas or water etc. is being consumed by the business?
Time: how long is the space being used for business purposes, as compared to other things?

Section BIM47825 is most helpful, as it provides examples. Such as:

Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade. The room represents 5% of the floor area of the house.

His Council Tax, insurance and mortgage interest bills total £4500. He claims 5%, £225.

His electricity bill for heating & lighting is £300. He claims £15, which is 5% of the total.

His total claim is £240 (plus the business proportion of his phone bill).

Although Bill has apportioned his electricity bill by floor area rather than usage, the amount claimed is small and there is nothing to suggest that his business use is significantly greater or lesser than his private use. It can be accepted as a reasonable estimate.

If any of the examples sound like you it might also be worth reading tax consultant Nichola Ross Martin’s comments on them.

What about business rates? Section BIM46840 says “A home in which a trader sets aside a room as an office is likely to attract only a council tax charge”. And a proportion of this may be tax deductible if you are using it for business purposes.

The Business Income Manual is one of many made public in the aftermath of the Freedom of Information Act. Before the manuals became available the most accessible guidance from the HMRC were the notes that came with the self-employment pages of the tax form. The latest notes contain worked examples and are also quite helpful.