Use of Home for Sole Traders
Where a business owner works or runs their business from home, they are entitled to reclaim a portion of their costs on their tax return. Most ecommerce business owners work from home and so this article will talk about the options available to you if you work from home.
The rules for sole traders are different to those for directors of limited companies. This article only focuses on the rules for sole traders.
If you are a sole trader working from home, you have two options available to you for reclaiming a portion of your private residence expenses:
- Simplified expenses for the self-employed
- Calculating proportion of personal and business use for your home
Read more below to find out more about each approach. Please note that HMRC has a simplified expense checker to help you decide which method works best for you.
Simplified Expenses for the Self-Employed
This approach is the most straight forward way to reclaim a portion of expenses. Using this method, you can claim a flat rate based on the number of hours that you work from home each month.
The figures include an allowance for heat and electric, council tax, mortgage interest/rent but do not include phone and internet charges, meaning you may be able to reclaim your telephone and internet bills on top of the flat rate. Read more about other expenses that you can reclaim in our expenses guide here.
Please note that you will need to work a minimum of 25 hours a month from home to qualify for this scheme.
This means that if you work on your business for 30 hours per month then you will be able to reclaim £10 per month (£120 per year) on your tax return.
The advantage to this method is that it is incredibly easy and saves time as you don't need to calculate anything other than the approximate number of hours worked from home each month. The drawback is that the rate is often relatively low in comparison to the actual costs associated from working from home.
Calculating proportion of personal and business use for your home
This method calculates the actual business expenses incurred as a result of working from home. If you are using this method you must ensure that all associated records and supporting calculations are kept for up to 6 years.
In this method first you need to calculate the proportion of your home that is used for business. To do this you should do the following:
- Count how many hours (on average) you work from home per week. Take this number and divide it by the total number of hours per week (168 hours). E.g. if you work 2 hours (on average) per day then you would calculate 14/168 = 8.33%.
- Count how many rooms you use for your business. Take this number and divide it by the total number of rooms in your home (do not include corridors or hallways in this calculation). E.g. If you work from your living room and your home has 2 bedrooms, a living room, a kitchen and a bathroom (5 total) then you would divide 1 by 5 = 20%
- Take the figures from steps 1 + 2 and multiply them to give you the total proportion as a percentage. E.g. 0.0833 * 0.20 = 0.017 (1.7%)
This percentage is then used against any allowable expenses (more on these below) to calculate how much can be offset against your trading profit.
What costs are reclaimable?
There are a number of costs which are allowable. Some costs relate to the whole house and have to be paid even if there is no trade use. Examples include:
- Council tax
- Mortgage interest (principal repayments are never allowable)
If part of the home is set aside solely for trade use for a specific period, then a part of these costs is allowable.
Other costs that are reclaimable include:
- Heat, light and power
- Metered water charges
- Telephone and Internet
For example if your rent is £1200 per month and your council tax is £120 (using the above example) you use your living room solely for business purposes for two hours per day, then you can reclaim 1.7% of £1320 = £22.44 per month.
Flat Rate vs Apportionment
Taking the above example, 2 hours per day means you are working between 51 and 100 hours per month. Using HMRCs flat rate method, you can reclaim £18 per month. This is lower than the £22.44 that we calculated above, however, saves much more time and reduces the need for record keeping and calculations. So unless you are spending a lot of time working from home, and incurring lots of additional expenses, for example using your home for photography or filming, we often recommend the flat rate to ecommerce businesses.