How to Put Your Home Running Costs Through the Business

As a creative business owner, you're probably spending at least part of your working life at home. Whether it's editing videos, designing graphics or brainstorming new ideas, your home workspace is integral to your business. But did you know you can claim tax relief on the costs of running your home? Here's your straightforward guide to the options available.

Sole Traders: Your Home, Your Tax Relief

If you're self-employed (sole trader), claiming tax relief for home running costs is pretty flexible. You have two straightforward choices:

1. Simplified Expenses (Flat Rate)

This method is super easy. HMRC offers a flat-rate allowance based on the number of hours you spend working from home each month:

• 25–50 hours/month: Claim £10 per month
• 51–100 hours/month: Claim £18 per month
• 101+ hours/month: Claim £26 per month

No need to keep detailed records of your utility bills or calculate exact usage. This method is quick, stress-free and hassle-free - perfect for creatives who’d rather focus on their art than spreadsheets.

Note: You can claim telephone and internet costs separately, on top of these simplified expenses.

Important: If your business is VAT registered, you cannot use the simplified expenses option.

2. Actual Expenses Method

If your home workspace is more substantial or your costs are higher, you might prefer the actual expenses method. Here's how it works:

• Work out the percentage of your home used for business purposes. For example, if your workspace occupies one room out of five, you might claim 20% of your household bills.
  
• Costs you can claim include electricity, gas, water rates, rent (if renting), mortgage interest (not repayments), insurance and council tax.
• Keep clear records of bills and calculations. It takes a bit more effort, but can significantly boost your tax relief.

Capital Gains Tax Risk: If you use a room exclusively for business purposes, it may trigger Capital Gains Tax when you sell your home. Best practice: ensure rooms have some element of personal use to avoid this issue.

Limited Companies: Different Rules, Different Options

If you run your business as a limited company, the approach changes. Because you and your business are legally separate entities, your options are slightly different:

1. Flat-Rate Allowance

Limited companies can pay you a flat rate of £6 per week (£312 per year) without needing receipts or calculations. This method is simple, quick and keeps paperwork to a minimum.

2. Rental Agreement with Your Company

For larger workspaces or more frequent homeworking, you might prefer a formal arrangement where your company pays you rent for using your home:

• Draft a simple rental agreement between you (the homeowner or tenant) and your company.
• Set the rent at a fair market rate based on the space used and local rates (don't inflate it - keep it realistic).
• Declare this rental income on your personal tax return, but offset it by claiming a proportion of your home expenses. Usually, this ends up tax-neutral for you personally.

This method requires more paperwork, but it might offer greater tax efficiency if you have significant home running costs.

Capital Gains Tax Risk: Like sole traders, limited company directors must also be careful. If you designate a room exclusively for business use, it could lead to Capital Gains Tax liability upon sale. Maintain some personal use of the space to avoid this risk.

Key Differences Summarised:

• Sole traders have more flexibility and simpler flat-rate allowances. You can choose simplified flat-rate expenses or claim detailed actual costs.
• Limited companies have limited simple allowances (£6/week) but can opt for a formal rental arrangement for larger claims.

Which Option is Best for You?

Consider these factors:

• How often and how much of your home you use for your business.
• How much paperwork and record-keeping you're comfortable with.
• Whether simplicity or maximum tax savings is your priority.

Your choice should reflect what's most practical and beneficial for your business and lifestyle.

Final Tips

• Keep accurate records, even if you're choosing simpler methods.
• Avoid inflating your claim. HMRC is strict about fair and reasonable expenses.
• Regularly review your situation; as your business evolves, the best tax relief option may change.

Navigating tax relief for home running costs doesn't have to be complicated. Whether you're operating as a sole trader or running a limited company, there's a solution designed for you. 

Need help?

Why not book a meeting with us to discuss your circumstances and see how we can help.