Freelancer’s Question: As business is picking up, I’m considering becoming a limited company instead of a sole trader, which I am currently. If I do incorporate a business and operate as a limited company, would I still be able to claim the same home expenses that I currently do as a sole trader? Even if I can make the same claims for use of home, I’ve heard from my accountant that it’s more complicated to do via a limited company; is that correct?
Expert’s Answer: If you’re running your business as a limited company, HMRC says that they won't be as generous to you as they are to sole traders. Strictly speaking, you can only include extra costs that you incur because you're working from home, such as the additional gas and electricity, and you can't claim any part of fixed costs that you'd pay anyway, such as rent, mortgage, or council tax. However, some accountants do treat company directors the same as self-employed individuals when it comes to home-working costs.
If your accountant is happy to calculate your homeworking costs the same as for sole traders, then on the basis that you and the company are not legally the same entity (and because it’s you, not the company, who owns or rents the home) - you can ask your accountant to draw up a rental agreement, showing that the company is renting a room from you. This won’t usually be more than one page of A4 and your accountant should have a template agreement they can give you. If your accountant doesn’t agree with treating company directors the same as self-employed individuals, then a rental agreement won't be needed.
Reimbursement by the company
The costs for the use of your home for the company will be out-of-pocket expenses that the company can usually pay you back for without anyone incurring extra tax.
You need to make sure that you don’t include in the company’s accounts more than the actual costs you’ve incurred working from home, otherwise the company will have to run these through your payroll and deduct PAYE and NI from the extra.
HM Revenue & Customs says that if you’re claiming £4 per week or less as a limited company, you don’t have to keep records of how you worked out the figure for use of home. Any more than that, and HMRC does expect you to keep records of your calculation to show if an inspector visits.
Your personal tax return
If your accountant is happy to calculate your homeworking costs the same as for sole traders and because, therefore, the company is renting the room space from you, this counts as income you personally receive for renting out a property.
That means that your accountant will need to put that figure in as rental income on your own personal tax return. But don’t worry - you don’t have to pay extra tax on it, because the income is offset by the costs you’ve incurred.
If that sounds confusing, here’s an example of how it works.
You’ve worked out that the amount you can claim for the year as business use of home is £600. The company puts £600 in as a cost in its accounts, and so pays corporation tax on £600 less profit as a result.On your personal tax return, you show:
Rental income £600
Property costs £600
Profit on rental £0
That’s because you had to pay the £600 yourself in order to maintain your home - it’s part of the electricity, gas, repairs and other bills you’ve paid for your home.
Flat rate isn’t on offer to ‘Ltds’
If you’re a sole trader, you can use the simplified expenses method to work out part of your home working costs. However, when your business is a limited company, then this method is unfortunately not available to you - so you’ll have to calculate your costs the long way round. This is perhaps what you mean when you mention things being more complicated!
Remember that small business expenses are often a complicated area, so if there’s anything you’re still not sure about you should seek the help of a professional accountant who can advise you further.
The expert was Emily Coltman FCA, chief accountant to FreeAgent, an online accountancy solution tailored to freelancers, contractors and the self-employed.
Editor’s Note: Further Reading –