Small and one-man companies commonly operate from the owner-director’s home office. The company can reimburse additional accommodation expenses incurred free of tax and National Insurance under ITEPA 2003, s 316 using the HMRC agreed rate of £3 per week or at a higher rate supported by receipts.
The type of expenses that can be claimed are limited and there is no deduction for mortgage interest. Self-employed individuals working in similar circumstances appear to have more flexibility because an appropriate proportion of total home expenses may be claimed.
It has been suggested that the owner-director should have a rental agreement giving the company a non-exclusive licence to occupy the serviced office facility.
The owner-director declares the rental income in his personal tax return, but is able to deduct the proportion of rental expenses, producing break-even or rental profits.
As a result, the company pays its share of the mortgage interest and a broader range of expenses, for example property maintenance.
Apart from potential difficulties with business rates or the mortgage lender, what are readers’ general views of this type of agreement?
Query 17,632 – Runner.
Reply by Courier
The writer is correct in stating that there is a statutory expense allowance of £3 per week under ITEPA 2003, s 316 in respect of payments by employers to cover reasonable additional household expenses incurred by employees in carrying out their regular employment duties.
Payments at this level are exempt from tax and National Insurance contributions and, as suggested by Runner, higher amounts are exempt where there is supporting evidence of higher additional household expenses being incurred.
A similar exemption applies for the self employed in respect of minor use of their home as an office, for example writing up the business records of the business, and HMRC will usually accept a reasonable estimate.
Examples in their manuals suggest that £2 per week may be acceptable, but again a higher amount could be claimed if costs incurred are higher and there is the supporting evidence.
For the employed, there is also specific guidance on home working by employees where two tests are met.
First, employment duties must be carried out at home and these must be substantive duties of the employment and, secondly, it must be an objective requirement of the employment duties that the work is carried out at home and nowhere else. However, any element of choice of where to work usually denies relief.
The suggestion made by Runner is one that has been discussed on the lecture circuit for a number of years. That is to say that the small company is offered office accommodation within the director’s home at an annual rental value in line with the cost of serviced office accommodation in the immediate vicinity.
The director is then in receipt of taxable income to include in the rental pages of his self-assessment return and, it is suggested, he may claim the appropriate deductions, as he would in respect of any other rental property, i.e. a proportion of allowable costs including mortgage interest, insurance, heat and light, repairs, etc. The company should therefore obtain a deduction for the rent paid.
This appears reasonable, but I have never seen anyone actually put such an arrangement in place for a client in the various firms I have been involved with since lecturers first started to put this suggestion forward.
Why, one might ask? All I can say is there appears to be a level of unease on the part of advisers in introducing such an idea to clients. Possibly this is nervousness that HMRC may attack and take a strong line seeking to disallow the corporation tax deduction for the company or the allowability of certain expenses for the director!
A downside of the arrangement is that it is likely a particular room would have to be put aside to be able to justify the serviced office rental agreement and to be in a position to defend any Revenue attack. This would inevitably lead to capital gains tax issues on the disposal of the director’s home.
On a slightly different note, I have also seen some practitioners’ claim exemption under ‘rent a room’ for rents paid to them by their companies for use of an office in their home.
This is an unfortunate mistake as HMRC’s guidance in Help Sheet 223 clearly states that: ‘“rent a room” does not apply to income from accommodation used as an office or for business other than by genuine lodgers (for example, students who are provided with study facilities in their lodgings, or lodgers who do some work in your home in the evenings or weekends)’.
So if you asked me whether I would put such an arrangement in place for my own company I think I may steer away from it and instead rely on the traditional expenses claim (obviously mortgage interest would be an issue as mentioned by Runner) for business costs and retain my capital gains tax main residence relief exemption.
Reply by Magnus
A claim for tax relief on home running expenses is not particularly popular with HMRC, as it means that tax relief is given on personal home expenses that are not incurred additionally for business purposes.
Having said that, there is a legal mandate for apportioning household expenses for tax purposes, based on the judgment of Mr Justice (as he then was) Templeman in Caillebotte v Quinn 50 TC 222 at page 227F to 227G. This means that a proportion of home expenses can be claimed when a room or rooms are used for business purposes. HMRC have recognised this fact by including information at paragraphs BIM47800 to BIM47825 in the Business Income Manual.
Therefore a proportion of home expenses can be claimed against the rental income from the company, based on a reasonable calculation of the number of main rooms in the house and expenses incurred. Factors to take into account are area, usage and time.
BIM478220 sets out the type of expenses that are relevant to a claim. They include mortgage interest, insurance, council tax, repairs and maintenance, cleaning, heat and light and metered water. One assumes that the company would pay for business telephone calls and broadband separately. It is wise not to over-claim, as did the accountant in Gazelle v Servini [1995] SSCD 324 (SpC 48), although a substantial claim was still agreed.
It is important that no single room is devoted exclusively to business purposes. Storing sports equipment, personal books, etc. in the business room helps the case, as well as having a television in the room. Such a course of action should preserve the capital gains tax exemption, although the current annual exemption would cover most cases where a tax liability is found to be due.
In the Lands Tribunal case of Tully v Jorgensen (VO) 2003 RA 233, Mrs Tully, an HMRC analyst who used one room at home for work, was able to defend a claim for business rates. It is important that the ‘business’ room is not entirely adapted for business purposes, and where some part of the room is retained for private purposes there is little likelihood of business rates being imposed.
In theory, application to the local planning authority for change of use of the room could be required, but this is unlikely unless some capital alterations, external signs and the presence of daytime visitors occur.
It is best to let ‘sleeping dogs’ lie.
Some Land Registry certificates also prohibit the use of home for business purposes, but this can be insured against. It is also wise to keep the mortgage lender informed.
In normal circumstances, this type of scheme, as outlined by ‘Runner’ should be easily achieved, provided it is dealt with carefully.
A closer look at Home/office expenses
‘The above query and replies consider home office expenses for an owner-director.
HMRC’s Business Income Manual at BIM47800 et seq gives HMRC’s view on the subject of ‘use of home. The basic ‘wholly and exclusively’ principles apply and the general rules underpinning whether a specific related expense might or might not be allowable are set out at BIM47810, ‘Specific deductions: use of home: wholly & exclusively’.
‘Tax law says that an expense is only allowable as a deduction if it is incurred “wholly and exclusively for the purposes of the trade” (ITTOIA 2005, s 34(1)). If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade (s 34(2)).
‘This page explains what is meant by part of the home being used “wholly and exclusively” for business purposes. If you need a more detailed review of the meaning of wholly and exclusively see BIM37000 onwards. Wholly and exclusively does not mean that: business expenditure must be separately billed; or part of the home must be permanently used for business purposes and not used for any other purpose at any other time.
‘Wholly and exclusively does mean that when part of the home is being used for the business then that is the sole use for that part at that time. Thus if the part of the home used for business purposes is also, at the same time, used for some other non-business purpose, no deduction is due.
‘The question is whether there are periods when part of the home is being used solely for business purposes. If part of the self-employed person’s home is set aside solely for business use for a period, they can claim as a deduction the costs they incurred on that part during that period. It will be most unlikely that they have a separate bill for that specific part and usually this exercise will involve apportioning the total relevant bill between the period of solely business use and the remainder of the time covered by the expense.’
