Soletraders who work at home may be able to deduct a proportion of their household expenses from their business income, and so reduce the tax they have to pay. We have previously discussed the principles, and here we look at more specific examples.

HM Revenue & Customs (HMRC) have given guidance on the apportionment of expenses for those soletraders who work from home, and also give some examples. Here we look at some aspects of these examples, but for the details, visit the HMRC website (www.hmrc.gov.uk) and ask your accountant how to apply these in your case. Take note though that HMRC guidance is just that, guidance and not law.

Rather than list all the examples, we look at what they indicate in terms of the extent to which you use your home for business.

1. Minor use

The example given of minor use is if the home is only used for writing up business records. In such a case, the guidance given to inspectors is that they should accept a reasonable estimate made by the soletrader. Of course, this raises the question of what is reasonable; we would be concerned about anything other than a small amount, the HMRC example referring to £104 (being £2 per week).

2. Exclusive business use of a room in a house

This is when a room in the house never has any other domestic use, and is used solely for business purposes. The HMRC example considers a small room in a house, and so uses percentage floor area (5% in this example) to apportion expenses such as council tax, insurance, mortgage interest (not the capital payments, remember) and electricity. That is, 5% of these costs are claimed as deductible expenses and used to reduce taxable profits.

Presumably for a small room compared with others in the house, using the number of rooms to apportion the costs would not give a close enough approximation of how much of the house that room really represents.

As the example points out, in other cases, this apportionment of electricity using area rather than usage might not be appropriate, if the business and domestic demands on energy differ significantly. Usage would then be used to apportion the electricity costs, while other costs may still be apportioned using area. This means that some costs may be apportioned in different ways than others, in the same business.

Take care though! Particularly with this example (but not exclusively) the issue of business rates may become important if you claim a part of your house is used solely for business purposes - see our words of caution in our first article on this subject.

3. Mixed use of a room

Where, as is commonly the case, a room may be used for different purposes at different times of the day e.g. for business during the day, as a living room in the evening, both area and time become important. Firstly, some decision will have to be made in terms of how much of the house that room represents (in terms of either floor area or number of rooms) and then the time for which it is used for business must be determined.

The HMRC example looks at a living room representing 10% of the area of the house, and used for 4 hours of business use per day and 4 hours of domestic use. An acceptable proportion of the costs of cleaning, council tax, insurance and mortgage interest to claim as deductible seems to be 4/24 x 10%.

This is interesting as it looks at the time of business usage (4 hours) compared with the total time for which the room is available (24 hours), rather than the total time actually used (8 hours). No reason is given for this. Maybe this is because a house would always be expected to have a living room available for 24 hours and so the soletrader can theoretically use it for domestic use for the entire 20 hours when not working, every day. This is our interpretation, and may not be what HMRC intends by this example.

Conversely, in a further example regarding an office in a house, costs are apportioned on the basis of the time for business use as a percentage of the time actually used (i.e. not the total time available). (The example is actually more complicated, but we think there’s enough to take in here already!). That this is because a distinction is made between an office and a living room is perhaps reading too much into this; what is highlighted is that there are many methodologies and if it came down to an enquiry into your tax return, you would have to debate your logic with HMRC.

There are many more nuiances to the examples given in the HMRC guidance and other costs considered such as redecoration and phone bills. This is not surprising given that few businesses are run so simply as the above examples may indicate. However, the key is determining a logical approach to this, discussing it with your accountant, and having the evidence to support your assertions.

As with all our information in The Business Lounge, this is not comprehensive tax advice, and may not apply to your specific circumstances; to discuss how these issues affect you, contact your accountant.