Did Ken Dodd have the last laugh with the taxman?
Charging your Company Rent
If you work from home a very tax efficient strategy is to charge your company for the use of your home.
The rent you get can be tax free!
There are 2 ways of doing this:
- Simplified Basis
- Apportionment Basis
Simplified Basis
This is the one most commonly used because HMRC have specified what you can deduct if you work more than 25 hours per month from home.
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This rate is often very low compared to the actual costs of working from home.
For this reason many businesses use the Apportionment Basis.
Apportionment Basis
The apportionment basis involves you calculating exactly what your running costs are. These costs include things such as.
- Mortgage costs if you own your home. Only the interest is allowable
- Rental costs if you rent your home
- Gas costs
- Electricity costs
- Council tax
- Insurance costs
- Cleaning etc.
Rent can be Tax Free
The rent that you charge is in respect of the reimbursement of costs incurred.
This way the rental income and costs on your tax return will be equal which means that there would be no personal tax due.
However, the company would have received a tax deduction for the rent and you would have received a contribution towards your costs.
You must include the income and costs on the property pages of your self assessment tax return. The company also has obligations to disclose the transaction in the notes to its year end accounts.
How is the Rent calculated?
The most common way is to apportion the costs on a room basis ie take the number of rooms in the house (not including toilets, kitchens, hallways) and proportion accordingly.
Example if it is a 4 bedroomed house, 1 Reception room and 1 room used as an office then totals rooms are 6 and so you apportion the cost as 1/6th of the total cost.
You then need to work how often the room is used for business eg 5 days per week.
Some costs such Electricity/Gas/Telephone could be done more on a usage basis.
Occasional costs such as repairs and decorations can be claimed.
You will need to keep details on file (eg copies of bills) and your calculation.
Rental Agreement
It is essential that there is a rental agreement between householders and the Company.
Having an agreement in place will help prevent HMRC from saying that this is just additional salary.
The agreement just needs to be a simple contract and should include a clause to say that the room is not for exclusive use by the business. This will help prove that the room is not used exclusively for business and so should help you avoid any capital gains tax issues if you sell your home.
Considerations:
Capital Gains Tax when selling your home
There is no Capital Gains tax as long as the room is not used exclusively for the business and it has some personal use.
Business Rates
In many cases Councils do not apply business rates if it is just a “home-office” situation but you should check with your Council.
The Valuation Office agency has provided guidance on this subject.
Useful Links:
Valuation Office Agency:
https://www.gov.uk/introduction-to-business-rates/working-at-home
HMRC
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim47820
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