Reply to: Use of home - What is the difference between these two links?

[TheCyclingProgrammer]

If it helps, the BIM pages (Business Information Manual) relate to expenses incurred by businesses, i.e. sole traders, partnerships and corporations. Some sections only relate to self-employed businesses.

The EIM pages (Employers Information Manual) cover employee expenses.

This might be why you are getting confused. When an employee receives an expense payment that isn't exempt (e.g. mileage), it is normally reported on the P11D and treated as a taxable payment unless relief is available which we would normally then claim on our self-assessment as "business expenses".

This is different to a sole trader deducting business expenses to calculate their taxable profit and the rules for each are different.

[d000hg]

Aha, found the link I was looking for - or one nearly identical. BIM47825 examples; it's the top googleresult when I search "HMRC use of home". Note some of these examples explicitly mention people running small businesses and others don't.

Then we have BIM47815 - Specific deductions: use of home: apportioning the expenditure. This starts by saying

This page and the examples at BIM47825 explain how to apportion expenditure where a self-employed person’s home is used partly for trade and partly for other purposes.

But then BIM37600 - Wholly and exclusively: duality of, or non-trade, purpose: travel costs: contents muddies the water further:

To qualify for a deduction from trading profits under S34(1)(a) ITTOIA 2005 (for unincorporated businesses) and S54(1)(a) CTA 2009 (for companies), the trade purpose of the expense must be the sole purpose.

I got tired at this point so I don't know where we stand! All these BIMs are giving me headache, it seems HMRC have several parallel schemes all worded differently!

[TheCyclingProgrammer]

What I don't get about the rental agreement is that HMRC use the % of floorplan (or is it % of number of rooms?) X % of the time used for company business. A normal rental agreement does not say you rent a room from 9-5 but the owner can have it back at night time, that seems odd to me.

A residential one might not, but a business let might. Why not?

If I'm renting MyCo a room, that should be MyCo's room - but we talk about CGT and duality of use. Nobody in their right mind would rent an office space from a guy who said "oh by the way, I might let friends sleep in the room sometimes" It seems a bit contradictory.

The dual purpose/PRR thing seems like a bit of a grey area but everything I've read and been advised says that as long as its not exclusively for business purposes (e.g. you built an extension soley for business use) then you're PRR should be protected.

That said, I can't even find the HMRC page I used to calculate things - it gave 4-6 worked examples e.g. "you live in a 5 bedroom house and work 2 days a week from a dedicated home office". I'm fairly sure this didn't talk about rental agreements - that page linked at the start of this thread looks new. Perhaps the system changed - I can't even find the link in old emails grr.

As jamesbrown said earlier, if you're self-employed you have things a bit easier. Whilst employees can only claim for the *additional* cost of working from home (or a flat rate of £4/week), if you're self-employed you can reasonably apportion your existing household expenditure.

As employees/company directors we can't hence if you need/want to claim more than the additional cost of working from home you need to formalise a rental agreement and charge a rate of rent that reflects the costs you can reasonably deduct as expenditure.

You say you have an "informal" agreement with YourCo but that's unlikely to cut it. Either YourCo is renting the space from you or its not. If it is, that means you need to declare the income on your self-assessment as rental income (which could be split between you and a spouse if you both own the house potentially) and also make any claims for deductions. Likewise HMRC would probably want to see a rental agreement as evidence on both sides (to support YourCo's corporation tax deduction and your rental income).

If this all sounds like a lot of pointless faff...well it is for most people. You need to run the numbers and see if it would actually be worthwhile doing. jamesbrown and I disagree on whether it would be worth doing for somebody working 100% from home but the reality is you have to work out your own numbers and see if it would be worth it.

It's not something I've ever bothered with to be honest.

[d000hg]

A link to someone else talking about it on CUK isn't exactly conclusive

What I don't get about the rental agreement is that HMRC use the % of floorplan (or is it % of number of rooms?) X % of the time used for company business. A normal rental agreement does not say you rent a room from 9-5 but the owner can have it back at night time, that seems odd to me. If I'm renting MyCo a room, that should be MyCo's room - but we talk about CGT and duality of use. Nobody in their right mind would rent an office space from a guy who said "oh by the way, I might let friends sleep in the room sometimes" It seems a bit contradictory.

That said, I can't even find the HMRC page I used to calculate things - it gave 4-6 worked examples e.g. "you live in a 5 bedroom house and work 2 days a week from a dedicated home office". I'm fairly sure this didn't talk about rental agreements - that page linked at the start of this thread looks new. Perhaps the system changed - I can't even find the link in old emails grr.

[jamesbrown]

Interesting. I guess technically speaking I have a verbal agreement with MyCo but nothing in writing

I've had two accountants and while both initially queried paying over the standard level, neither advised me to get a formal contract in place once the situation was clarified. Does an agreement need to be written down? You'd typically expect such a contract to be signed by both sides but here that's the same person so such a piece of paper seems rather worthless... I could draw one up tomorrow and date it 2007 and both parties (me!) could sign it.

Probably I'm happier letting HMRC decide it is taxable when they investigate me after a spot check at the 1st class ticket barrier leads to an investigation

Take another look at this:

http://forums.contractoruk.com/accou...ml#post1674275

Noting point 5, i.e. declaring the rental income on your SATR. So an inconsistency would arise.

[d000hg]

Interesting. I guess technically speaking I have a verbal agreement with MyCo but nothing in writing

I've had two accountants and while both initially queried paying over the standard level, neither advised me to get a formal contract in place once the situation was clarified. Does an agreement need to be written down? You'd typically expect such a contract to be signed by both sides but here that's the same person so such a piece of paper seems rather worthless... I could draw one up tomorrow and date it 2007 and both parties (me!) could sign it.

Probably I'm happier letting HMRC decide it is taxable - I am happy it's legit rather than trying to cream money from the company untaxed, or hiring an actual office space - than forging a document that would get me off the hook at the cost of morality.

[jamesbrown]

I haven't run the numbers but I would imagine for somebody who works at home 80-100% of the time it may well be worth taking the rental approach.

I agree re: sub-letting although that's not a tax issue and I'm not sure it's something I'd worry about; the CGT relief issue definitely needs to be considered although you can still avoid this being a problem. Hence, from my original post:

I'm not disagreeing with the accuracy of anything you've written, just providing an alternative perspective on where the balance lies (and acknowledging that even accountants can provide conflicting advice). I didn't personally find this to be worth the hassle after crunching the numbers and, as I said, I work 100% from home. Given the potential drawbacks - tax or otherwise - it just didn't seem worth the effort for a very modest saving. However, d000hg, in the absence of a formal agreement, I would suggest that you're on potentially shaky ground for the reasons stated above. I wouldn't be unduly concerned, as the worst case scenario would be having the claims disallowed, but you may want to revisit the basis for claiming with your accountant.

[TheCyclingProgrammer]

However, the issue of CGT relief on disposal remains (or breach of rental agreement in the case of subletting). I concur with NW that this is unlikely to be worth the effort. The 4pw/18pm, no questions asked, is going to be the best approach in the vast majority of cases.

I haven't run the numbers but I would imagine for somebody who works at home 80-100% of the time it may well be worth taking the rental approach.

I agree re: sub-letting although that's not a tax issue and I'm not sure it's something I'd worry about; the CGT relief issue definitely needs to be considered although you can still avoid this being a problem. Hence, from my original post:

this needs to be discussed with your accountant first so they can explain the potential issues that could arise from this if it isn't done properly.

[TheCyclingProgrammer]

CyclingProgrammer, that's the route I go down but I've never formally rented space to my company or been advised to do so by any accountant. I've been asked why I claim more than the standard (I claim £50pcm and it was once £100pcm for a while) but when I explained I work 75-100% from home, I didn't get any concerns about it.

Hmm...well the HMRC rules on employee expenses are quite clear. You can claim for additional costs with evidence or £4/week without evidence. Apportioning fixed costs you already pay aren't allowable without going down the rental agreement route and if queried you could find that any deductions you've been claiming for your self-assessment are disallowed meaning the reimbursement you've received from YourCo will be taxable.

In practice, it's probably unlikely to be questioned but it's worth bearing in mind.

[d000hg]

CyclingProgrammer, that's the route I go down but I've never formally rented space to my company or been advised to do so by any accountant. I've been asked why I claim more than the standard (I claim £50pcm and it was once £100pcm for a while) but when I explained I work 75-100% from home, I didn't get any concerns about it.

[jamesbrown]

Right - I covered this in my earlier post. If you're claiming use of home expenses above the flat rate as an employee/director then you can only claim a proportion of the *additional* cost which as you say, would not include your rent or mortgage interest. It may cover things like increased utility usage.

However, if you go down the route of renting the space to YourCo and have a proper rental agreement, then the (proportional) costs you can claim against your rental income are the same as any other landlord - this includes rent (if you're sub-letting) or mortgage interest. It could also include a proportion of other household costs such as utilities, broadband etc. It doesn't have to be an additional cost as you're claiming relief under completely different rules.

This is why if you work from home, renting to YourCo effectively lets you claim more than you could under employee use of home allowances which is why it might be worth doing if you work from home all the time.

In short, you'd calculate a proportion of your rent/mortgage interest/utilities etc. and use that figure as the rental value, meaning your rental costs cancel out your rental income and there is no tax due on the rental income. As long as the charged rent is at or below market rate then the full cost is allowable to YourCo for corporation tax and as long as what you charge YourCo doesn't actually exceed your claimable rental expenses, there is no taxable profit for you to pay personally either.

Yes, you could do this, in principle. For example, see this thread:

http://forums.contractoruk.com/accou...agreement.html

Notably:

http://forums.contractoruk.com/accou...ml#post1674275

However, the issue of CGT relief on disposal remains (or breach of rental agreement in the case of subletting). I concur with NW that this is unlikely to be worth the effort. The 4pw/18pm, no questions asked, is going to be the best approach in the vast majority of cases.

[TheCyclingProgrammer]

An accountant may want to offer more insight, but the distinction between being self-employed and a company director is relevant in this context. Further discussion here:

Contractors

Right - I covered this in my earlier post. If you're claiming use of home expenses above the flat rate as an employee/director then you can only claim a proportion of the *additional* cost which as you say, would not include your rent or mortgage interest. It may cover things like increased utility usage.

However, if you go down the route of renting the space to YourCo and have a proper rental agreement, then the (proportional) costs you can claim against your rental income are the same as any other landlord - this includes rent (if you're sub-letting) or mortgage interest. It could also include a proportion of other household costs such as utilities, broadband etc. It doesn't have to be an additional cost as you're claiming relief under completely different rules.

This is why if you work from home, renting to YourCo effectively lets you claim more than you could under employee use of home allowances which is why it might be worth doing if you work from home all the time.

In short, you'd calculate a proportion of your rent/mortgage interest/utilities etc. and use that figure as the rental value, meaning your rental costs cancel out your rental income and there is no tax due on the rental income. As long as the charged rent is at or below market rate then the full cost is allowable to YourCo for corporation tax and as long as what you charge YourCo doesn't actually exceed your claimable rental expenses, there is no taxable profit for you to pay personally either.

[jamesbrown]

jamesbrown: I thought you could include mortgage interest costs or rental costs when calculating and apportioning your costs.

An accountant may want to offer more insight, but the distinction between being self-employed and a company director is relevant in this context. Further discussion here:

Contractors

[TheCyclingProgrammer]

My accountant advised me to ensure that there was a duality of purpose to the office space, for example, by having a bed or sofa in it, to avoid being liable for business rates. In my case, when I had an office at home, my office did double up as a spare bedroom on occasion outside of office hours.

I've also read you can get around this by only renting for 5 days a week and specifying so in the rental agreement. It seems a bit of a grey area to me?

This is my accountant's information on charging YourCo rent if anybody is interested:
http://jf-financial.co.uk/2013/05/03...-company-rent/

Does anybody know how PRR could be affected if you use an outbuilding instead? E.g. bought a garden studio or converted a detached garage? Would either be considered part of your property and does it have to be considered part of your property to affect PRR? I suspect that technically an installed garden studio wouldn't technically be part of your property as it wouldn't be a permanent structure but the garage would.

jamesbrown: I thought you could include mortgage interest costs or rental costs when calculating and apportioning your costs.

[GillsMan]

Further, you want to avoid the scenario where you have a dedicated office space, as that potentially leaves you liable to business rates and loss of PPR (CGT) relief on the sale of your property (perhaps unlikely to be enforced). In other words, it's important that the home office space is dual purpose or potentially so.

My accountant advised me to ensure that there was a duality of purpose to the office space, for example, by having a bed or sofa in it, to avoid being liable for business rates. In my case, when I had an office at home, my office did double up as a spare bedroom on occasion outside of office hours.