Running a limited company from the comfort of your own home offers several advantages, especially when it comes to cost-effectiveness. Starting your business without the added expenses of renting an office space, paying additional services, heating, and electricity can save you a significant amount of money. However, when you operate as a limited company, it's essential to understand the unique tax implications compared to sole traders or you can hire a FreeAgent accountant who will manage it all for you.
To help you navigate tax-related matters for your home-based limited company, here's a breakdown of what you need to know about your home office costs and what expenses you can claim.
Equipment
If your company owns equipment that you use for work, you can claim tax relief on its cost through capital allowances. You have two options: either purchase the equipment using the company's bank account or credit card and classify it as a business expense or use your personal funds and claim the cost as an out-of-pocket expense. If the equipment is predominantly used for business purposes and the private use is minimal, it won't be considered a taxable benefit.
However, if the equipment is used more frequently for personal use, it will be deemed a taxable benefit. In such cases, the company must report it on a P11D form and pay Class 1A National Insurance (NI) contributions.
Phone and Internet
You can claim one mobile phone or SIM card exclusively used for business without reporting it to HMRC. This phone can also be used for personal purposes without incurring additional tax. However, any additional phones will be considered taxable benefits, and you must include them in your P11D form and pay Class 1A NI contributions based on their value.
If your home phone line is under the company's name and mainly used for business calls, it won't be treated as a taxable benefit.
Regarding broadband, if you already had a connection before working from home for your limited company and the company reimburses you for home broadband, it may attract an extra tax charge. However, if you didn't have broadband before and require it to work from home, primarily using it for business purposes, it may not be considered a taxable benefit. Consult with an accountant if you're unsure about your specific situation.
Running Your Home
While your home also serves as your office when working from home, certain complications arise when calculating business expenses because your home is not owned by the company but rather by you or your landlord. HMRC states that as an employee, including being an employee of your own company, you cannot claim a portion of "fixed costs" that you would have to pay regardless of working from home. This includes rent, council tax, and mortgage interest.
Generally, the only costs you can claim back from your company when working from home are the additional expenses incurred due to your work, such as increased electricity and heating bills. These claims are usually acceptable if you work from home out of necessity because your company lacks an alternative office space. However, if calculating the exact amount to claim becomes overly complicated, there's an alternative. HMRC does not scrutinise the calculation method or consider it a taxable benefit as long as the reimbursement doesn't exceed £6 per week or £26 per month.
Keep in mind that there are exceptions to claiming additional costs. If the work you do at home doesn't generate income for the company, you will likely be unable to claim any home working costs without incurring additional tax and NI. For instance, a company director who conducts all chargeable work outside the home and only uses their home for administrative purposes typically cannot claim running costs from HMRC.
Overall, you can always reach out to your FreeAgent accountant to discuss the points highlighted above or to gain a better understand of how FreeAgent is beneficial for small businesses.
Effective Expense Tracking
With FreeAgent, you can conveniently record and track your expenses in one place, allowing you to see real-time updates on your tax liabilities.
At Acumenica, we are specialist contractor accountants who use FreeAgent as part of our service. See why we use it here.
