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Working from home is becoming more popular. Office equipment to make it feasible is fast becoming affordable, working styles are making it practicable and transport congestion and travel costs are rendering it attractive. The possibilities range from a self-employed person working solely from home and having no other business base, to an employee who takes work home from time to time but is mainly based at a conventional office. In these notes we shall look at

Tax deductible expenses
Problems for employees
Capital Gains Tax
Travelling expenses to the office
Other issues

Tax relief for the self-employed

For a self-employed person, tax relief will generally be available on additional expenses which are incurred through working at home. But it is important to have some record which will support any expense claim. It is no longer possible, as might have been the case in the past, simply to claim tax relief for a round-sum notional figure such as “use of home as office - £10 per week.” Instead, it will be necessary to show specific items of actual expenditure. If an expense relates only partly to the business (telephone bills, for example, where the phone is used for private calls as well as business ones) then the cost should be apportioned and you should keep some evidence to show that the apportionment is reasonable - a log of phone usage for a representative period, perhaps.

There may be some costs which can clearly be shown to relate exclusively to the business. These might include business telephone calls; light and power costs which are on a separate meter for the business part of the home: insurance where there is a separate policy or an identifiable part of the premium which is specifically referable to use of the home for business. More often it will be necessary to apportion costs which relate partly to business used and partly to non-business use.

The factors to be taken into account when apportioning an expense include:

Area: what proportion in terms of area of the home is used for business purposes?
Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
Time: how long is it used for business purposes, as compared to any other use?

For a self-employed person working from home the following household costs might in part be tax-deductible:

Insurance
Council Tax
Mortgage Interest or rent
Repairs and maintenance
Cleaning
Heat, light and power
Phone line rental
Internet access charges

In each case, the normal basis of apportioning costs would be to take account of both the proportion of the home that is used for business and the amount of business use. For example, a spare bedroom may double as an office during the week and as guest accommodation at weekends - in that case the whole-house costs need first to be apportioned on the basis of floor area (say 15% attributable to the room) and then the part attributable to the room should be apportioned by reference to the time it is used for domestic or business purposes (say 50%) – leading to a claim for 7.5% of the total household costs listed above. Other costs such as phone line rental and unmetered internet access charges should be apportioned by reference to business and non-business use.

In some cases other factors may be relevant: for example the amount of power consumed for the business activities may be disproportionate to the area of the home used for business. A common-sense view would need to be taken: ultimately the test is – is the apportionment reasonable and justifiable on all the facts?

In addition, capital allowances will be due in respect of on furniture and equipment purchased specifically for use in the business. Where there is part business and part non-business use, a proportion of capital allowances will be due.

Where a person is self-employed as a partner in a partnership or as a member of an LLP the same rules apply to the deductibility of expenses, but these expenses must be claimed, if at all, by the partnership or LLP in its own taxation computation even if the expenses are in fact incurred not by the business but by the individual partner: a partner or LLP member cannot make his own “free-standing” claim to tax relief independently of the partnership or LLP.

Tax Relief for employees and directors

Unlike for a self-employed person for whom tax relief will generally be available on additional expenses which are incurred through working at home, a claim for use of home by an employee or director is a much more difficult proposition altogether. Expenses will be tax-deductible only if incurred “wholly, exclusively and necessarily” “in the performance of the duties.” The Revenue interprets the legislation very strictly and in their view this means that tax relief is due only if:

The duties that you perform at home for your company are substantive duties of the employment. “Substantive duties” are duties that you as an employee have to carry out and that represent all or part of the central duties of your employment
Those duties cannot be performed without the use of appropriate facilities
No such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect him or her to travel to those premises on a daily basis); and
At no time either before or after the employment contract is drawn up is the employee able to choose between working at the employer’s premises or elsewhere.

Of course, the penultimate and final condition will are academic if your company’s only office premises are within your home. However, where this is not the case, it should be borne in mind that if facilities are available at your company’s office premises and it is a matter of personal choice that you work from home, tax relief will not be due.

Furthermore, even where the “wholly and exclusively and necessarily” test is passed it is the view of HMRC that relief can be claimed only for such costs as:

The additional unit costs of gas and electricity consumed while a room is being used for work

The metered cost of water used "in the performance of the duties" (if any)
The unit costs of business telephone calls (including "dial up" Internet access)

Relief will be denied for expenses which are regarded as incurred partly for the employee’s domestic purposes. This includes:

Council tax
Rent
Water rates
Mortgage repayments/endowment premiums
Household insurance premiums

By concession, HMRC will now agree that any employee who passes the “wholly, exclusively and necessarily” test can claim expenses of £3 per week (plus the cost of business telephone calls) without the need to evidence them; but if the employee wants to claim a larger amount this must be evidenced by records.

The problem is somewhat alleviated (but by no means removed) by a further piece of legislation (s316A of Income Tax (Earnings and Pensions) Act 2003) which provides exemption from tax where your company makes a payment to you as an employee in respect of “reasonable additional household expenses” which the you incur in carrying out duties at home under “home working arrangements”. Importantly, there is no requirement under this legislation that the costs be “necessarily incurred in the performance of the duties”. Thus payments may be tax-free even where an employee voluntarily chooses to work from home.

A Licence Agreement

One way round the considerable difficulty of the “wholly, exclusively and necessarily” test may be to grant a licence over a part of the home to the company for use in the business. A reasonable rent should be fixed, lest it be challenged by the Revenue as disguised remuneration; but a rent which reflects only the apportioned costs, perhaps with a modest addition for the use of furniture, would normally be reasonable. The rent received will be taxable on the employee or director of course - but it should be possible to deduct from the rent the costs of providing the accommodation so the net effect is that tax relief is given on the apportioned part of the general and specific household costs attributable to the use of home. The same caveats as above apply as to the need to ensure that the deduction claimed is reasonable having regard to the actual amount of use made of the home for business purposes.

Capital Gains Tax

A gain made on the “principal private residence” is of course free of CGT. But the exemption is restricted if and to the extent that any part of the home is used “exclusively for the purposes of a trade or business.” The important word here is “exclusively.” Use of a part of a home for the business will not compromise the CGT relief if that part is also used for domestic purposes - though, as explained above, the income tax relief for part-business and part-private use will be less than for wholly-business use. And even if part of the home is used exclusively for the business, there may in the event of sale be little or no CGT to pay for a number of reasons:

Properties prices can go down as well as up.
If there is a gain, the part apportioned to the “exclusively business” part (usually on the basis of floor area) may be small and within the CGT annual exemption - remember that if the house is jointly-owned by husband and wife then each spouse gets a separate annual exemption.
If there is a gain which is in excess of the annual exemption, and a new house is being bought which will also have some exclusive business use, it may be possible to claim CGT roll-over relief to defer payment of any tax until the replacement house is sold.

Even if there is a risk of a charge to CGT on sale, it may well be that the value of income tax relief now may be greater than the possible cost of an indeterminate amount of CGT at some possibly remote future date.

Travelling expenses

Costs of commuting (i.e., travelling to a normal place of work) are not tax-deductible, whether for an employed or self-employed person. So if you do not work from home at all the costs of getting to wherever you normally work have to be met out of taxed income. On the other hand, if you travel from home on a business journey (i.e. to somewhere other than your usual workplace), the full cost of the journey is generally tax-deductible. This applies whether you are employed or self-employed, and regardless of the extent to which you work from home (or indeed if you don't work from home at all).

It is clear from Kirkwood v Evans that the fact that an employee works from home is of no effect at all in interpreting the employee travel rules. So there is still no relief for going into the office, even if you have to go in only occasionally and then only to collect and deliver work. Mr Evans went in weekly but presumably even less frequent attendance would be caught provided it was “regular”. But if the other workplace is "temporary" (meaning, broadly, that you do not expect to be working there on a regular basis for more than two years) your costs of travelling there will be tax-deductible.

For the self-employed working from home the position is less clear. A self-employed person - a partner in a professional firm, say - may regularly work from home a day or two every week but attend the firm’s office on the other days. There will be no relief for that travel, which remains essentially home-to-work travel. The position is slightly less clear if he works at home for four (or five, or six!) days a week and travels in for meetings just once a week. It may then be possible to argue on the facts that the principal place of work is home and that the travel to the firm’s premises should be treated in the same way as travel to client meetings. Less contentious is the position where someone starts and ends the day working from home but in the course of it travels in for a meeting at the office. There seems no reason why in that case travel costs should not be deductible as for any other business trip.

Business rates

Business rates may be due in respect of any part of a property from which a business is run. If there is exclusively business use of part of the property, it is likely that business rates will be due on that part (with the remaining, domestic, part being assessed to Council Tax. According to the Valuation Office (which is responsible for business rates valuations) if there is only part business use, the property is likely to remain banded as domestic property unless the business use predominates or structural alterations have been carried out to facilitate business use. A Lands Tribunal case in 2003 (Tully v Jorgensen [2003] RA 233) goes a little further and indicates that business rates will probably not be due (even in respect of a part of the property used predominantly for business) if:

Any rooms used for home-working are part of the ordinary accommodation of the house which has not been structurally altered to accommodate home-working and
The furniture and equipment used for home-working is such as might be found in any domestic study and
No customers or clients visit the premises home in connection with the business.

The president of the Lands Tribunal went on to say that business rates were unlikely to be in point unless a business at the premises is advertised or if planning permission is sought for building operation or for business use.

On balance therefore, it is likely that working from home will not in most cases give rise to a liability to account for business rates.

Other issues

Some other non-tax issues need also to be considered.

Insurance needs to be considered. Use of the home for business may invalidate insurance cover unless the insurers are notified. Again, insurance companies seem to be happy provided they are told and provided that the business does not involve business visitors coming to the house. But remember that you may need to tell insurers about expensive office equipment in the house, and to increase cover accordingly.
Strictly, the terms of a mortgage deed may require lenders to be told, particularly if you are proposing to grant a licence to your employer. In practice, we find that few lenders are notified and we have yet to see any problem caused by this.

Warning

These notes are intended for general guidance only and should not be relied upon in any particular case. You should seek advice in relation to your own individual circumstances.