S34 Income Tax (Trading and Other Income) Act 2005.This page looks at some of the types of expenditure that may be allowable. It should not be seen as an exhaustive list. What is allowable depends on the facts in each case.Expenses broadly fall into two categories, fixed costs and running costs.
Fixed costs
Some costs relate to the whole house and have to be paid even if there is no trade use. These include costs such as Council Tax, mortgage interest, insurance, water rates, general repairs and rent.
If part of the home is set aside solely for trade use for a specific period then a part of these costs is allowable. It will normally be appropriate to apportion these expenses by area and time. Some particular points are considered below.
Insurance
If the trade use is covered by a separate policy then the cost of that policy is allowed in full, with no part of the household policy being allowed.
Otherwise, an appropriate part of the premium can be allowed.
Council Tax
The Council Tax is a tax on property. In principle it may be allowable in those instances where other property-based expenses are deductible. If trade use is established the appropriate proportion of the tax may be allowed under the normal rules for the deduction of expenses. More detailed guidance can be found at BIM46840.
Mortgage interest
If part of the home is used solely for the trade then an appropriate part of the mortgage interest is an allowable deduction. Repayments of capital are not allowable.
More detailed guidance on interest payments can be found at BIM45650 onwards.
Rent
Part of the rent is an allowable expense when the home is rented and part is used solely for trade purposes.
A sole trader cannot charge a separate rent to his or her own trade. This is because individuals cannot rent property to themselves. The allowable expense is the proportion of the rent paid to the landlord that is properly attributable to the part of the home being used solely for trade purposes. Where a partner charges rent for the use of their home by a partnership of which they are a member, see BIM38110.
Repairs and maintenance
A proportion of the cost of general household repairs and maintenance is allowable in line with the proportion that the house is used solely for the trade. Examples include the general redecoration of the exterior or repairs to the roof.
Repairs that relate solely to part of the house that is not used for the trade, such as decorating a room not used for the trade, are not allowable. Equally if a room is used solely for trade purposes then the cost of redecorating that room is wholly allowable.
For more information on what is a repair, see BIM46900 onwards.
Running costs
There are some expenses where the total bill may vary with the amount of trade use. They include cleaning, heat and light and metered water.
If the claim is small and there is only minor trade use of the home, for example the taxpayer writes up their trade records at home, you may accept a claim based on any reasonable basis.
Where there is significant trade use it is appropriate to apportion such expenses by reference to the facts of that usage.
Cleaning
The facts may result in a higher proportion of costs attributable to either trade or domestic use.
For example, a cleaner may clean the living rooms but be under strict instructions to leave the office alone. In this situation, the payments to the cleaner are not an allowable expense.
Heat, light and power
A proportion of the heating and lighting costs of a room used at times solely for trade purposes is allowable. The proportion should reflect the facts of usage. Where usage is minor, such as the occasional writing up of records, you may accept any reasonable estimate consistent with such minor use.
You should take into account the number and nature of any power consuming items involved. A commercial photographer working from home using specialist studio lighting will have a much higher trade expense for electricity than a trader writing up records once a week in the spare bedroom.
Telephone
The cost of business calls is allowable. Also allow a proportion of the line rental (based on the ratio of trade use to total use). This proportion should reflect all aspects of use, including incoming calls, though in most cases reference to itemised outgoing calls will provide a reasonable and acceptable measure.
Care should be taken and a flexible approach adopted when considering the level of apportioned trade expenditure, relating to all inclusive packages offered by telephone and broadband providers.
Broadband
Expenditure on an internet connection (including broadband and wireless broadband) is allowable to the extent that the connection is used for trade purposes. Where there is ‘mixed’ (trade/non-trade) use, follow the approach used for telephone rentals.
Metered water charges
In cases of heavy usage the trade part of the property may be separately charged (and so fully allowable) in which event none of the domestic cost is deductible.
In the case of minor trade use of the premises, such as writing up records, there is no trade use of water and so none of the water charge is allowable.
BIM47825 – Specific deductions: use of home: examples
If there is only minor use, for example writing up the trade records at home, you may accept a reasonable estimate without detailed enquiry.
The following examples are a guide only and intended to demonstrate the principles to be applied. The examples are not intended to be prescriptive; each case will be dependent on the facts.
Example 1
Angela writes up her trade records at home. She uses a room solely for trade use for a short period each week. She estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.
Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.
Example 2
Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade. The room represents 5% of the floor area of the house.
His Council Tax, insurance and mortgage interest bills total £4500. He claims 5%, £225.
His electricity bill for heating & lighting is £300. He claims £15, which is 5% of the total.
His total claim is £240 (plus the business proportion of his phone bill).
Although Bill has apportioned his electricity bill by floor area rather than usage, the amount claimed is small and there is nothing to suggest that his business use is significantly greater or lesser than his private use. It can be accepted as a reasonable estimate.
Example 3
Bert runs a small business. He uses the spare bedroom at home as his office except for a week at Easter and a week at Christmas. All he does is to write up his records, once a week.
The house has 10 rooms. Bert calculates that his trade expense, based on 1/10 of the total costs would be £450. Bert recognises that this is far too much for what he actually does at home.
Bert estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.
Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.
Example 4
Chris is an author working from home. She uses her living room from 8am to 12am. During the evening, from 6pm until 10pm it is used by her family. The room used represents 10% of the area of the house.
The fixed costs including cleaning, insurance, Council Tax and mortgage interest, etc total £6600. A tenth of the fixed establishment costs is £660. For the purposes of fixed costs, one sixth (4/24) of the use by time is for business, so Chris claims £110.
She uses electricity for heating, lighting and to power her computer, which costs £1500 per annum. Chris considers an apportionment of these costs by time and area. A tenth of the costs are £150 and half of these costs by time (4/8) relate to business use, she claims £75.
Her itemised telephone bill shows that a third of the calls made are business calls. She can claim the cost of those calls plus a third of the standing charge.
She has a broadband internet connection which she uses for research purposes as well as for private use. Two thirds of the time spent online is for business purposes, so that two thirds of the monthly charge is allowable.
Example 5
The facts are as in example 4.
Chris has some work done on the house. She has the exterior painted and at the same time has the dining room re-decorated.
What, if anything, can she claim as a deduction?
The exterior painting is a general household cost. She can claim a proportion based on business use.
Chris does not use her dining room for business purposes. The cost of redecorating the dining room is not an allowable expense.
Example 6
Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours.
The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.
After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480).
The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.
Example 7
Bill entertains a number of customers at his home. Each time he hires caterers and also a firm of cleaners.
Although Bill has used his home for trade purposes, he cannot claim any of the costs as there is legislation that disallows entertaining costs – see BIM45000 onwards.
Source : HM Revenue & Customs