Can you claim any household expenses if you run a business from home?

As more people choose to work from home, small business owners and startups frequently ask if they can reclaim any home office expenses.

What is the golden rule when it comes to business expenses?

The general HMRC rule for claiming tax relief on business expenses is that you can only reclaim costs that have been ‘wholly and exclusively’ incurred in connection with your trade.

If your personal and business expenses are ‘mixed’, you can only deduct the business element if it can be separately identified.

HMRC will usually allow certain ‘home office’ claims as long as they have been calculated on a reasonable basis, and that nothing excessive has been claimed for.

Therefore, you should calculate your home office expenses with great care, preferably with the help of an accountant.

The rules are different for sole traders and limited company directors and employees.

Two methods of claiming for home office expenses

Here are three methods for calculating home office expenses: (a) claiming a proportion of your household expenses,  (b) claiming the fixed HMRC-approved rate, and c) drafting a rental contract if you’re a limited company director.

a) Claim a proportion of your household expenses

One option is to calculate the portion of your home used for business purposes. This can be done by dividing the total number of rooms in your property or by using a proportion of the total floor space.

If you’re a sole trader, you can claim the equivalent proportion of your general household expenses, including mortgage interest or rent, utility bills, contents insurance, and council tax.

You can access HMRC guidance and some examples in BIM47820.

If you’re a limited company director, you cannot claim for any fixed costs (like rent), as you would pay these anyway. You can only claim incremental costs which you can prove. This could include increased utility costs.

Ensure you keep all your receipts, bills and workings just in case.

b) Claim a fixed HMRC expense each week or month

A simpler alternative is to claim HMRC’s flat rate of £6 per week / £26 per month, which doesn’t require you to keep receipts.

This method is particularly useful if your household costs related to business use are not significant.

For many, unless you have substantial household expenses tied directly to business use, claiming the fixed rate is a more straightforward option.

Many limited company owners opt for this option, as their scope to claim back a proportion of household expenses is limited.

c) Create a rental contract with your own company

A third option – for limited company directors only – is to create a rental agreement between you and your company.

This must be a commercial agreement, based on your real working arrangements, subject to ‘market rent’.

Although the company can claim tax relief on the rental costs, the director is taxed on the rent received via self assessment.

You should take care when drafting such an agreement and be able to justify the amounts involved.

Potential pitfalls of claiming expenses for your home office – grey area

Home working related expenses cause more confusion than many other types of expenses from our experience.

Here are some frequently asked questions from the ByteStart team.

Do I have to pay business rates?

If you clarify that part of your home is dedicated to business use, this may attract the attention of the local authority Valuation Office, who may be keen to apply business rates. If that space is for “mixed-use”, i.e. personal and business use, then business rates should not be applied.

Will I have to pay CGT if I sell my home in the future?

If part of your home is used exclusively for business purposes (e.g., a home office or workshop that’s not used for personal purposes at all), that portion of the property may not qualify for Private Residence Relief when the property is sold.

This could lead to a Capital Gains Tax (CGT) charge on the part of the house used solely for business. This is worth considering if you’re a limited company director with a rental licence in place with your own company.

However, if the space is used for both business and personal purposes, or is only occasionally used for business, the entire home generally remains exempt from CGT under Private Residence Relief. See CG64660 for clarification.

Can I reclaim any of my mortgage costs?

If you’re a sole trader (not a limited company director), mortgage interest can also be offset against tax, but only the business-related portion of the interest (not the capital repayments). The same applies for rent.

This applies to people who work from home and can allocate a portion of their mortgage interest based on the area of the home used for business purposes.

However, claiming this deduction must be done carefully and accurately to avoid potential issues with HMRC. This is another example of why using an accountant makes sense.

What about insurance and mortgage conditions if I work from home?

Insurance and mortgage providers, as well as landlords, often require you to confirm that your home is used solely for residential purposes.

However, if you’re running a small home office, this is unlikely to raise concerns, especially given how common working from home is these days.

To avoid any potential issues, it’s a good idea to inform your mortgage provider, landlord, or insurer that you work from home, just to make sure you don’t accidentally breach any terms and conditions, however unlikely this is.

Only make valid claims and seek help if you need it

To avoid triggering an HMRC investigation when you make your claim on your self-assessment form, you must be sure that your claim is genuine and necessary.

You should only claim if the amounts involved are significant and if you genuinely use a proportion of your home solely to run your business. You should be prepared to provide full calculations for any expenses claimed.

Above all, check with your accountant first, as the rules are complicated.