New dividend tax: how contractors can prepare - charging company for WFH premises

[Danglekt]

Does that mean people who rent own a proportion of their landlords property?

Someone has explained it better than me by mentioning capital gains tax implications , as I mentioned I'm not 100% on it all, just a recollection from when I was reading up on it a year or so ago. I rent, so it didn't really mater to me

[WordIsBond]

Wow, a lot of confusion.

A. Contractors who WFH can have your company pay rent to you, just like any other employee working from home can be paid by his employer.
B. Just like any other employee working from home who is paid something for office expense, you can claim a portion of your interest expense, council tax, utilities, insurance, etc against that.
C. Most calculations are based on how many rooms in the house, not the size of the room. If you have eight rooms, and one is an office, you can use a 1/8 ratio. If you have 20 rooms, it is 1/20.
D. You determine what percentage is office use. If you use it 80% of the time, you apply that percentage. So 1 of 12 rooms, used 80% of the time, would get relief on about 6.5% of costs.
E. There is no complication with claiming relief for mortgage interest. You cannot claim relief for mortgage principal.
F. If you use the room 100% for office, it attracts capital gains tax when you sell your home. Don't do this. Sit in there and play solitaire for half an hour every week, if necessary. Whatever you do, don't go to 100%.

But should you pay more than those expenses? Probably, but how much more depends on how much risk you want to take.

Every pound of rental profit (the amount over the reliefs you claim) is taxable as personal income, but also reduces your company's profits. For a basic rate taxpayer, this is currently a wash for this year, but....

1. If you pay yourself a salary of £8060, and do not have other income, you have an unused £2540 of personal allowance. You can pay rent up to £2540 without any personal tax liability or NI, and reduce your profit (and corporation tax) accordingly.
2. If you pay a salary of £11,600, you have no income tax, but are paying employee's NI. Assuming you claimed employment allowance, you have no employer's NI. By reducing your salary by £2540, and paying enough rent (above allowable reliefs) to have £2540 in rental profit, you would save the employee's NI.
3. If other income uses up your personal allowance, people with enough to hit the higher rate band still get a very small improvement with rent vs dividends. Rent doesn't have the dividend tax credit (gross/net) game to play. So you can slightly increase how much you pay yourself before hitting the higher rate band.
4. If you are married and jointly own the home, rent can be split equally between spouses.

That's this year.

Next year:
1. At more than £8060 salary, for £2940 of rental profit you'll reduce the corporation tax without any tax liabilities. If you paid that £2940 in salary, you'd have NI (employee and employer). If you paid it in dividends, you'd have corporation tax.
2. If you have other income, so your personal allowance is used up anyway, rent is still better than dividends. You increase personal income taxyou will still benefit by paying enough rent to have rental profit. You will be reducing your corporation tax by 20%, and your dividend tax on the remaining profits (7.5%, net 6%), and increasing your personal income tax by 20%. That's a win.
3. There is the same spousal advantage as this year.

So the article isn't stupid at all. This is definitely a way you can save tax under the new regime, especially if you don't have other income -- it allows you to use up more of your personal allowance without any NI or corp tax liability.

But there IS a problem. A pretty big problem, actually. Because it is tax advantageous, HMRC will scrutinise anything that looks doubtful, and anything that is deemed excessive / above market price can draw investigation and trouble. And then they start checking all your reliefs and everything else.

So what is market price? Well, what would another business pay for a room in a residential house on your street, presumably with no direct outside access, so they have to go through your house to get into it? Oh, and they also have to let YOU use the room some of the time, too, so it doesn't hit that 100% and trigger capital gains.

This isn't a person renting a bedroom (and presumably access to the kitchen, etc). It's a business coming into your home and using a room. I'd say it would be very, very hard to find any business that would want to, which means market rate is probably pretty low, and it also means HMRC will go after you heavily if you make it very high at all.

I suppose that is all a tldr way to say, yes this makes sense, no the article wasn't stupid, but HMRC is going to be onto this, and if you don't want to be investigated and challenged on it, you'd best keep the rental profit pretty low. Otherwise, they'll say it's all a dodge and disallow all of it, and then you've got a mess.

On accountant's advice, I'm paying £500 / year in rent. I'm just claiming the £4 / week -- tracking the expenses is too much hassle. We wanted to be conservative -- you might get away with more than £500, but how much is it worth the risk?

I joked about using Rent-a-Room rates here: http://forums.contractoruk.com/accou...t-i-guess.html. But the general idea of rent being more tax efficient than dividends is sound.

[jamesbrown]

I went through all these calculations of apportioning bills by space and time (don't forget time), assuming the space wasn't a dedicated office (raising issues of business rates and CGT relief etc.), but the main reason I didn't go through the hassle is that the numbers were trivially different from the default annual allowance of £216. Sure, it will vary with circumstances, but unless you're willing to push the boundaries, it's a complete waste of time in my experience. YMMV, good luck, etc.

[TheCyclingProgrammer]

Someone has explained it better than me by mentioning capital gains tax implications , as I mentioned I'm not 100% on it all, just a recollection from when I was reading up on it a year or so ago. I rent, so it didn't really mater to me

In short, you get 100% CGT relief any gains on your main home when you sell it (PRR) but if part of your property has been used mostly for business there is a theoretical risk that you could lose PRR on that proportion of your property. Not sure to what extent this has been tested by use of a room as an office - in normal circumstances it shouldn't be a problem but renting it to YourCo could raise it as an issue. Its often advised to make any rental agreement for Mon-Fri working hours only for this reason.

[Maslins]

My overall view - a few people could squeeze out a few more quid at a slightly lower tax rate with some extra faff, but nothing more than that. Nothing to get excited about, or for the majority to do anything differently to what they're currently doing.

A few general points:
- there are different rules for sole traders than for Ltd Co owners (or employees), so take care when Googling stuff,
- assuming on this forum everyone runs a Ltd Co, the £4/week is the way most people go,
- if you go above that, you (as home owner/primary tenant) are subletting partial usage of your home, which won't qualify for rent-a-room (as it's to a business), so needs declaring on your personal tax return, as you've become a BTL landlord,
- you can typically avoid CGT issues by ensuring any room used for business isn't used exclusively for business...which of course means any calculations would need to factor that in (ie 1 room in 5 is used 80% for business = claim of 20% x 80% = 16%),
- rates highly unlikely to become an issue assuming it's just one person sitting at their computer.

[centurian]

More to the point, why is this being linked to the dividend tax - nothing in the legislation makes this any more or less legal than it was before July.

So why is this suddenly a good idea now ?

If it's such a wonderful idea, why were you not doing it 5 years ago. Have you been gratuitously overpaying on tax for the past 5 years out of the kindness of your own heart.

History repeating itself - when IR35 was announced, a whole load of schemes cropped up marketed at contractors - and look at how deep in the increment some of those folks are now.

[jamesbrown]

More to the point, why is this being linked to the dividend tax - nothing in the legislation makes this any more or less legal than it was before July.

So why is this suddenly a good idea now ?

If it's such a wonderful idea, why were you not doing it 5 years ago. Have you been gratuitously overpaying on tax for the past 5 years out of the kindness of your own heart.

History repeating itself - when IR35 was announced, a whole load of schemes cropped up marketed at contractors - and look at how deep in the increment some of those folks are now.

Exactly. No substance, but perhaps a cheap marketing tool, i.e. attach a name/brand to some "stuff" and make it into an article. Counterproductive in this case, because it would lead me to flag this particular adviser as clueless.

[northernladuk]

More to the point, why is this being linked to the dividend tax - nothing in the legislation makes this any more or less legal than it was before July.

So why is this suddenly a good idea now ?

If it's such a wonderful idea, why were you not doing it 5 years ago. Have you been gratuitously overpaying on tax for the past 5 years out of the kindness of your own heart.

History repeating itself - when IR35 was announced, a whole load of schemes cropped up marketed at contractors - and look at how deep in the increment some of those folks are now.

Very good point well made. I don't think there is a problem to re-address your situation and tighten up on the valid stuff in you've been lax in the past but be wary of invented situations or pushing over line on other stuff you would have been comfortable with in the past.

That said, I am not too sure there is anything wrong with the OP looking at his situation as he is at home 100% so slightly different to most of us. He might have been claiming the £4 when in fact he had a case to claim more.

[SueEllen]

More to the point, why is this being linked to the dividend tax - nothing in the legislation makes this any more or less legal than it was before July.

So why is this suddenly a good idea now ?

If it's such a wonderful idea, why were you not doing it 5 years ago. Have you been gratuitously overpaying on tax for the past 5 years out of the kindness of your own heart.

History repeating itself - when IR35 was announced, a whole load of schemes cropped up marketed at contractors - and look at how deep in the increment some of those folks are now.

Agreed.

Any accountant worth paying would advise you on this if you worked over 80% from home and asked them about additional costs due from doing so.

Also my office and quite a few other people's offices I know have beds in them, while others have a music instrument. To make it clear it's not an office 100% of the time.

[TheCyclingProgrammer]

Just a small point as it doesn't often get mentioned, but if you work from home a lot you can claim more than £4/week without the faff of the rental agreement. You are entitled to claim any additional costs incurred as a result of working from home however you need to show evidence of how you calculated this - the good thing about the £4 flat rate is that it's no questions asked and no calculations are needed.

In practice though, additional costs might be a small percentage of your utility bills but not much else as this cannot include a proportion of any fixed costs that you already pay and that includes any line rental or broadband costs as they fail the duality of purpose test. Which is why most people just claim £4/week and forget about it.