Reply to: Rental Agreement between company and director

[northernladuk]

Have any threads you've read on your accounting boards mentioned the kitchen?

If you were a proper contractor you'd be spending and hour a day on the bog. You going to claim for thst space as well?

[ladymuck]

The kitchen is used for work 25% of the time and the home office is used 90% of the time for work.

How? Let's put it into simple numbers so you can see how silly your statement is.

Say you work 100 hours a week, then 90 of them are n the office. That leaves you with 10 hours in the kitchen. However you're saying you do 25 hours in the kitchen in addition to your 90 hours in the office.

Please explain how you can take a working week of any duration and get 115% out of it.

[Scarface]

Bored of this now. I don't know why you are asking us are you are clearly going to do it anyway. You won't listen to us and we won't be convinced so pointless carrying on really.

Do whatever you feel is right and carry on.

Not necessarily. I'm probably going to leave it considering I do not own the property and it is going to just cause a sh*t ton of problems. It seems if I owned the property though it could be possible.

But I am digging because most posters have shot the idea down and a lot of stuff I've read on Accountant's blogs have just contradicted what's been said

[Scarface]

Thanks mate for this response. This has been pretty useful

I use a rental agreement but we own our home.

Then this is probably going nowhere.

Whoops. This was a typo. Meant to say I emailed my accountant. Have corrected typo in initial post

If you are the sole employee then you aren't using the kitchen 25% of the time and the office 90% of the time. That exceeds 100%. In fact, your kitchen usage is negligible. Forget that one.

The kitchen is used for work 25% of the time and the home office is used 90% of the time for work.

The two sentences above are contradictory. The expenses you incur personally are irrelevant to what your company can agree to pay you. They are relevant only to whether you can claim any expenses on your self assessment to offset what your company pays you. That is a very different question.

I agree that out of pocket expenses and a rental agreement have nothing to do with each other. Point taken so the rate on the rental agreement doesn’t necessarily have to have a relationship with any out of pocket expenses occurred.

Your company can only pay you fair market rental. It might be difficult to establish what is fair market rental for an office area within a private home, however. Go searching to see what the market rate in your area is for offices in private homes. I'm sure there are a lot of them advertised....

Good point. Thank you

We use market rate in our area for rental of an office with a similar floor space, divided by three to reflect the difficulty of marketing such a space within a private home, and multiplied by 80% to reflect business usage. Your number starts to get smaller.... If we use an outbuilding (which someone on here does and we are considering), we'll go much closer to market rate for our area, maybe 2/3.

Yes, there is definitely scope to have such an agreement, though not if landlord doesn't agree.

Your accountant is correct. I'm not going to look it up, I did once before. It's in the HMRC guidance either for Rent-a-Room or for home as office. Look it up yourself, you'll find it.

He is correct.

I don't know for sure if he is correct on this but since he is on everything else I'd assume he knows what he's talking about.

He is correct. And you can't claim property allowance, since you are renting to a company you control.

He is correct.

Fortunately your landlord would never agree to this, preventing you from doing something so incredibly stupid.

No, they wouldn't be alarmed. When they see it is for rent, they'll rub their hands together gleefully, and say, 'Let's find out what this idiot did and see how thoroughly we can torture him.'

[northernladuk]

Bored of this now. I don't know why you are asking us are you are clearly going to do it anyway. You won't listen to us and we won't be convinced so pointless carrying on really.

Do whatever you feel is right and carry on.

[Scarface]

Why is the bathroom not a room? It would also depend on the size of the rooms. It can't be 25% if the room is a box room and is only 10% of the overall property. Isn't it percentage floor space so if you've got a lot of hallways I'd expect you ought to include them. I.e. Use a percentage of the total square footage.

It would have to be all your time always.. Not just for covid. Something very few of us actually do.

Thats the thing though. I have been working primarily from home since February last year with infrequent visits to the the client office. My low expenses in the Accommodation and Travel category in my accounts would reflect this should HMRC investigate.

In respect of the breakdown, as I've said before there doesn't appear to be a precise formula provided by HMRC - their own advice is that household overheads should be apportioned between domestic and business use on a “fair and reasonable basis.” So my understanding is that a fair and justifiable formula can be used. There appears to be a few different suggestions with most to least aggressive presented below

1. Cost based on number of rooms used for office
2. Cost based on floor usage only
3. As above, except multiply by days used (5/7)
4. Instead of multiple by days used multiply by hours used per week

For points one and two most authors have not suggested including the bathroom or hallways as HMRC does not deem these to be "normal living space". Some even suggest potentially excluding the kitchen.
Here are a few links but there are dozens more if 'hmrc normal living spaces use of home' is searched on Google

If I work from home, how can I claim for these costs? | Loud and Clear Accounting
How do I calculate my working from home expenses? - FreeAgent
What Household Overheads Can You Claim For When Working From Home in the UK? - Upwork Blog

[WordIsBond]

I use a rental agreement but we own our home.

I have emailed my landlord and he's come back with a discouraging response.

Then this is probably going nowhere.

• I am the sole shareholder and employee of the company
• I personally rent an apartment from a landlord (i.e. My name is on the Tenancy Agreement and not the company)
• The office room is used almost exclusively for business purposes (90% of the time) and the kitchen is used a significant amount of the time too for business (approx 25%)

If you are the sole employee then you aren't using the kitchen 25% of the time and the office 90% of the time. That exceeds 100%. In fact, your kitchen usage is negligible. Forget that one.

Given that I work from home the majority of the time I think it would be legitimate and fair for me to set up a rental agreement between the company and I to reimburse me for expenses I incur personally. I understand the total needs to be based on floor space and fair market rentals and that it needs to be OK'd by the landlord.

The two sentences above are contradictory. The expenses you incur personally are irrelevant to what your company can agree to pay you. They are relevant only to whether you can claim any expenses on your self assessment to offset what your company pays you. That is a very different question.

Your company can only pay you fair market rental. It might be difficult to establish what is fair market rental for an office area within a private home, however. Go searching to see what the market rate in your area is for offices in private homes. I'm sure there are a lot of them advertised....

We use market rate in our area for rental of an office with a similar floor space, divided by three to reflect the difficulty of marketing such a space within a private home, and multiplied by 80% to reflect business usage. Your number starts to get smaller.... If we use an outbuilding (which someone on here does and we are considering), we'll go much closer to market rate for our area, maybe 2/3.

I have found some evidence that there is scope to write up this rental agreement (see links below)

Yes, there is definitely scope to have such an agreement, though not if landlord doesn't agree.

Companies cannot claim for Rent a Room scheme nor individual can claim it as rental to a company. This is strictly if you rent a room in your home to a lodger, first £7500 in rent received is tax free and if more that this is received, the excess is taxable.

Your accountant is correct. I'm not going to look it up, I did once before. It's in the HMRC guidance either for Rent-a-Room or for home as office. Look it up yourself, you'll find it.

Rental agreements with own limited company are aggressive kind of tax claims and must be done very carefully in order not to get in trouble.

He is correct.

This could possibly work with owned property but not so much with rental property.

I don't know for sure if he is correct on this but since he is on everything else I'd assume he knows what he's talking about.

Rental income must be declared on self assessment tax return.

He is correct. And you can't claim property allowance, since you are renting to a company you control.

Rent charged should be based on market rental rates not the expenditure.

He is correct.

If both of the above are not possible I suspect the only option is to get the company's name on the Tenancy Agreement. Is this also 'aggressive' tax avoidance for personal service companies in the eyes of HMRC?

Fortunately your landlord would never agree to this, preventing you from doing something so incredibly stupid.

Given that I have barely claimed for any expenses in prior years will HMRC be alarmed if they see a sudden spike in year on year expenses?

No, they wouldn't be alarmed. When they see it is for rent, they'll rub their hands together gleefully, and say, 'Let's find out what this idiot did and see how thoroughly we can torture him.'

[wattaj]

Surly he could also claim for his 50” led TV as a training aid and + food if he consumes most of it during his working day ?

Why not? Free money!

[northernladuk]

Why is the bathroom not a room? It would also depend on the size of the rooms. It can't be 25% if the room is a box room and is only 10% of the overall property. Isn't it percentage floor space so if you've got a lot of hallways I'd expect you ought to include them. I.e. Use a percentage of the total square footage.

It would have to be all your time always.. Not just for covid. Something very few of us actually do.

[Scarface]

Here is a decent article on it...

A contractor’s home is his office - Contractor Weekly

You say apartment so I expect it isn't large either. To be claiming you rent out a sizeable percentage of where you live as well just make it sound like you are taking the piss when HMRC come calling.

You also admit it's not dedicated and you can't claim anything for the kitchen so you are flying a bit close to the wind here no?

Claim the £6

Thanks for sending that article. My takeaway from example 2 in that article is that if a room is used exclusively for business, tax relief on it can be legitimately claimed. So for example, if there is four rooms (excluding bathroom and halls) and they are of equal size, and one of them is the office, 25% of the 'cost' could be claimed. I put cost in inverted commas as I assumed it would be 25% of rent but that article seems to suggest using the mortgage which I'm not privvy to. In any case, the key takeaway is that if the contractor spends all of their time working from home, it would be fair and reasonable for the business to pay a fair proportion of that

For a contractor who spends the majority of their working time away from their home office and only carries out limited administrative tasks at home during the evening, this may well be reasonable. However, for a freelancer that spends the majority of their time working from home, HMRC’s fixed rate is inadequate.

All of the above assumes the landlord approves a business to be registered at the premises which as you've pointed out is by no means certain.

[GhostofTarbera]

"But, but, but £6 is A LOT LESS that the £7,500 that I WANT TO CLAIM! I'm going to keep searching until I find the answer that I want..."

Or some-such other whiny excuse.

Surly he could also claim for his 50” led TV as a training aid and + food if he consumes most of it during his working day ?


Sent from my iPhone using Contractor UK Forum

[Scarface]

"But, but, but £6 is A LOT LESS that the £7,500 that I WANT TO CLAIM! I'm going to keep searching until I find the answer that I want..."

Or some-such other whiny excuse.

I've never said I was planning on claiming £7,500. Appreciate the whiny response though

[wattaj]

...Claim the £6

"But, but, but £6 is A LOT LESS that the £7,500 that I WANT TO CLAIM! I'm going to keep searching until I find the answer that I want..."

Or some-such other whiny excuse.

[northernladuk]

Here is a decent article on it...

A contractor’s home is his office - Contractor Weekly

You say apartment so I expect it isn't large either. To be claiming you rent out a sizeable percentage of where you live as well just make it sound like you are taking the piss when HMRC come calling.

You also admit it's not dedicated and you can't claim anything for the kitchen so you are flying a bit close to the wind here no?

Claim the £6

[northernladuk]

Currently its registered in the Accountant's office.

The Tenancy Agreement currently prohibits businesses to be registered at the property. However I assume that's a standard clause in the contract to protect them from a business opening which gets a lot of customers in the house causing a lot of wear and tear, using excessive water, eletricity etc. An IT contractor would pose few of these issues. I appreciate there would be ramifications for insurance though so I have asked the landlord if he sees any issues with me registering the business here.

I am sure there are many other legal reasons for it as well. All of which are a pain in the arse to the landlord and are of no benefit so most will say no. I won't let my tenants open one or having anything to do with this. It can only go wrong.

Could you post your comments after you've quoted it. Difficult to see the context if you answer first before telling us which post you are replying to.