Homeworkers – renting a room to your company – the facts!

Guest blog by Elaine Clark of Cheap Accounting

(Winner of CCH & AccountingWEB.co.uk’s Progressive Practice 2010, as heard on Radio 4 Money Box)

Elaine Clark of Cheap AccountingIf you operate your business and work at home, why not rent a room to your business? By doing so you can offset the rental against your business profits and reduce your overall tax bill.

So how does this work?

Well there are just a couple of things you need to do to put this in place.

Trading as a limited company

Rental Agreement

You would need to put a rental agreement in place between you, as the home owner and your limited company. Your accountant should have a standard agreement available for you to use. So this will not be an onerous task.

Calculate the rent

Then you need to calculate a rental. The rent that you charge should be equal to the amount that the room in the house costs you. That means that the income received is equal to the costs and there is no personal profit on the rent. So you do not have to pay any income tax on the rent received, although the income and costs will need to be shown on your self assessment tax return – just a couple more boxes to complete.

Let’s take an example to show how this works.

Sam runs her business from home. She works in one of the bedrooms. The bedroom is used exclusively for business during the week but serves as a guest room at the weekends.

Her house has a total of 6 rooms, all of equal size.

Sam has added up her mortgage interest, council tax, utilities, insurance and broadband costs and they amount to £12,000 for the year.

She calculates the rental charge as follows:

Cost per room = £12,000 divided by 6 rooms = £2,000

She uses the office 5 out of 7 days, so charges 5/7th of the room cost to the business.

The rental charge is £1,428 for the year.

Sam is paid this rental from the business.

The business records this as a cost in the company accounts, which reduces its tax bill.

Sam enters the figures onto her self assessment tax return but has no further tax to pay on the amount received from the company.

What Next?

The rent charged will be based upon your own circumstances. For example if you rent your property you can use the rent paid instead of the mortgage interest in the calculation. So you will need to do your own specific calculation.

Have a chat to your accountant about how to get this in place. They should be able to help you with the figures and the rental agreement to ensure that you are claiming this tax deduction for your business.

Common Misconceptions

Capital Gains Tax – there is no implication of capital gains tax as long as the room is not solely used for the business e.g. the office in the bedroom.

Business Rates – if you work at home you should check your local council’s web site which will give information about business rates. In many cases the council do not apply bushiness rates if it is just a ‘home office’ situation.

The Valuation Office Agency gives this as guidance:

To decide whether or not part of your property should be liable to business rates there are a number of things we have to consider, including the extent and frequency of the non-domestic (business) use of the room (or rooms) and any modifications made to the property to accommodate that use.

Remember that business rates may apply if you work at home regardless of whether or not you rent a room to your business or not.

Self-employed Sole Trader

The principles for claiming use of home as office is much the same if you are a sole trader except you do not need to have the formality of the rental agreement in place, as you and the business are one and the same.

The same calculation applies, as do the common misconceptions.  It is worth noting that, subject to final legislation being passed, from April 2013, self employed businesses can elect to use a flat rate charge for use of home as office as follows:

25-50 hours per month – £10

51-100 hours per month – £18

101 hours or more per month – £26

You can of course still claim the allowable portion of actual expenses calculated as above, which may be more than the flat rate.

Elaine Clark is Managing Director of the Award Winning national accountancy firm, CheapAccounting.co.uk. She was named Woman in Finance by the Network of Aspiring Women in 2011. She has made several appearances on BBC Radio 4’s Money Box with Paul Lewis and is frequently asked by newspapers, magazines and websites to provide expert comment about tax, finance and other issues relevant to small and medium-sized businesses in the UK. You can follow Elaine Clark on Twitter.

 

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