Government unveils new takes on the self-employed

Self-employed people who work at home can now claim more business expenses than ever before, according to new tax guidelines published this week.

HM Revenue & Custom's updated Business Income Manual states you can now claim a proportion of telephone line rental on a domestic phone, a proportion of exterior house repairs, and even a proportion of the cleaning bill for your home-based office.

Under the guidelines, self-employed people who work at home can now claim "a great deal more," to the extent that "almost every self-employed person will be able to claim something", said freelance tax expert Nicola Ross Martin.

In the updated manual, available on HMRC's website, expenses of running a home-based business are broadly divided into two categories - running costs and fixed costs.

The former includes expenses where the total bill may vary with the amount of business use, whereas fixed costs - like mortgage, council tax, repairs and insurance - are payable even if there is no business use.

However, if part of the home is set aside "solely for business use for a specific period" then a part of these costs is allowable, HMRC said.

This means that in terms of both mortgage and rental payments for a property, self-employed people can appropriate part of the interest or rent as an allowable expense, but only if part of the home is used solely for business.

Conversely, there are some expenses where the total bill varies depending on the amount of business use. For example, cleaning, heat, light, metered water, broadband and telephone services.

For these expenses, tax officials have been told that "if the claim is small and there is only minor business use of the home" - such as the taxpayer writes up their business records at home - "you may accept a claim based on any reasonable basis."

Officials at HMRC must also take a "flexible approach" when considering the level of claim a business makes through Web or telephone use, in light of "all inclusive packages offered by providers."

To help taxpayers calculate their allowable expenses from running costs, presumably for the self-assessment deadline in July not next week, the tax authority issued the following advice:

  • 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?

Reflecting on the changes, which are illustrated in real-world examples to help 'at-home' businesses, HMRC said: "The home has a dual role for many self-employed people. It is where they live and also where they carry on some or all of their business.

"Even if they carry on most of their business elsewhere they are still entitled to a deduction for the part of the household expenses provided that there are times when part of their home is used solely for business purposes."

Nicola Ross Martin, author of 'What expenses can I claim, when working from home,' thinks it's "great" HMRC are prepared to list some realistic business examples where the guidelines come into play.

"This will put an end to all those arguments with officers about duality and mortgage interest," she said. "On saying that, do remember that HMRC's manuals are only their interpretation, they are no replacement for the actual statute and you cannot rely on them in court."

Although the Revenue failed to announce the changes, its new guidance hints that the principles of claiming expenses for a home-based business have been updated to simplify the process for the self-employed.

"The distinction for what you can and cannot claim has, I will admit, often foxed me," Ms Ross Martin wrote in an editorial for Accountancy Web.

"It is always a bit of a game trying to keep up with what is being updated in HMRC's manuals, and with self-assessment filing a matter of days away, one wonders if this latest one has been deliberately hidden."

But the good news for business comes in the same week that the tax authority renewed its attack on company owners who source their income via dividend payments, one advisor has claimed.

Commentators speculate that such a move could be designed to counterbalance the generosity the taxman is extending to self-employed taxpayers who use their homes for business.

Issued in a press release by DTE, the warning states HMRC will use the Employment Securities legislation to levy PAYE tax and national insurance contributions on dividends, to nullify the tax-efficient way owner-managers take cash out of their businesses.

The accountancy firm claims HMRC will chase PAYE tax and national insurance where it believes:

  • special purpose companies are used to disguise cash bonuses as dividends;
  • a series of low-value shares are issued to employers who receive a small amount via the pay that is topped up with a dividend;
  • 'composite companies' are trying to circumvent the IR35 regulations that stop self-employed workers from paying less tax where HMRC believes they are really 'hidden employees'.

Mervyn MacDonald, the firm's head of tax, said the guidance makes no reference to owner managed companies, with just one class of shares paying low salaries and high dividends.

"However, HMRC's references to 'contrived arrangements', 'arrangements that are used mainly to disguise cash bonuses', 'dividends as benefits', and 'thinly disguised general earnings' lead me to conclude that the low salary/high dividend strategy will soon become an 'unacceptable arrangement', potentially subject to attack by HMRC on the grounds that is it in place mainly to generate a PAYE tax and national insurance saving," he said.

"This is ominous news for the owner managed business sector," he added, "which is already struggling under a heavy burden of tax red tape and compliance issues."

But Roger Sinclair, legal consultant at Egos Ltd, says there is no evidence suggesting paying a low salary and a dividend is facing fresh scrutiny from HMRC.

He told Freelance UK: "This doesn't seem to me to add anything new - the focus appears to be generalised attempts to look closely at possible ways to re-categorise dividend receipts by employees into employment income - which we knew they were trying to do anyway. I don't see anything new behind this that specifically targets the owner-manager."

 

29th January 2007

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