Claiming expenses for working at home
Q: I’ve been talking to my mates down the pub and I’ve found out that some of them claim lots more Use of Home in their accounts than I do- yet we do similar things. Why is that?
A: There are two main ways of calculating use of home. If there is only minor use, for example writing up the business records at home, you may put through a reasonable estimate with little risk of dispute by HMRC. Needless to say, it should be consistent with your household utility bills though.
If you were based from home, then you could apportion the household bills such as gas, electric, water etc by dividing the total costs over the number of rooms, and multiplying that figure by the number of rooms used for business purposes.
In order to satisfy tax law, when part of the house is being used for the business then that must be the sole use for that part at that time. Thus if the part of the home used for business purposes is simultaneously used for some other non-business purposes, then no deduction is available. You should also avoid making one of your rooms solely for business purposes and out-of-bounds to the rest of your family though. Doing this could jeopardise an element of your Only or Main Residence Relief for Capital Gains Purposes, which normally sees any gain on your home reduced to nil.
As you can see from the above, if you don't work from home regularly, you may be using the first method. If you are working regularly from home, then it would be advantageous to use the second, i.e. apportionment method.
In practical terms, you will need to be seen to be applying common sense to your claim, for example, if you only write up your books at home, there would be a far smaller charge than if you were working each day from home and treating it like an office.
Although there is no fixed proportion of costs for particular trades, there is an expectation of what use of home will amount to. Any enquiries from HMRC will be more likely when the amount of use of home claimed is significant and inconsistent with the nature of the trade.
Can I claim the cost of work clothing?
Q: I am self employed and while I do most of my work at my office, there are frequent occasions when it is necessary for me to visit clients in their workplaces in appropriate business dress. I need to buy a couple of new suits for such meetings – is this considered an allowable expense for tax purposes?
A: This is one of a variety of expenses which the Courts have held to have an “intrinsic duality of purpose” – which means they are not deductible for tax purposes.
The suits are actually classed as “ordinary clothing worn by a trader during the course of their trade” and are not deductible expenditure for tax purposes. This is the case regardless of whether particular standards of dress are required, for example, to comply with the rules of a professional organisation, or simply for the trader to keep up appearances on meeting clients. Conversely, the cost of clothing that is not part of an ‘everyday' wardrobe, such as protective clothing and uniforms (especially where they bear your business logo) is deductible against your business income for tax purposes.
If you think you are not claiming enough business expenses such as clothing, please feel free to contact TaxAssist Accountants for some advice.
Letting a furnished property
Q: I have just started to let out the flat that I previously lived in and have bought new furniture for most of the rooms. I have registered for self assessment with HM Revenue & Customs, so when will I receive a tax return and can I get some tax back if I have made a loss?
A: If your letting income has only recently commenced, the first tax return you will need to prepare will be the 2011 return, which covers the tax year from 6 April 2010 to 5 April 2011. You will need to report all income received during that period, not just the income from property you received.
The cost of purchasing new furniture for the rental property cannot be deducted against the rental income in the year. When you first start to let out a furnished property, you need to choose between two options for relief with regard to the cost of furnishings.
Although you cannot claim the cost of the initial furnishings purchased, one option is to use the ‘replacement’ basis, which means that you can deduct the cost of replacement furniture in the future. If you have just purchased new furniture, this may not be the best option as presumably it should not need replacing for some time.
The alternative is that you can claim an annual ‘wear and tear’ allowance as a deduction from the rental income. The allowance is 10% of the gross rents, after deducting any rates you have paid on the property such as council tax or water rates. If this annual allowance is adopted, the cost of replacing any items of furniture cannot be claimed in the future.
Losses on arising from rental income cannot be offset against other sources of income, so if you have made a loss, it will not generate a tax refund in the year. The loss will be carried forward and offset against future rental income profits.
In order to ensure that you do claim all reliefs available against your rental income, it is advisable that you seek professional guidance.
Lloyd Stubbs specialises in managing tax and accountancy affairs for small business owners and can be contacted by phone or email
Tel: 01476 590555
www.taxassist.co.uk/grantham – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.