Sole Trader Allowable Expenses – Calculate Home Office In 3 Easy Steps

Sole trader allowable expenses

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If you are running a business and operating as self employed then you’ll know the importance of maintaining good accounting records to support the figures submitted on your annual self assessment tax return. Amongst other things this usually includes keeping hold of receipts and invoices relating to your sole trader allowable expenses. You may also come across situations where your business is clearly incurring additional expenses but calculating exactly how much and obtaining a receipt is almost impossible.

Using your home as an office is a perfect example of this situation as many of your personal expenses can increase as a result of your business activities. Luckily for us HMRC have some clear guidance for sole trader allowable expenses such as “use of home as office”.

In this article we will explain the options available to you as a sole trader when accounting for home office costs and look in detail at how to account for these additional sole trader allowable expenses that can be tricky to identify.

What Is A Home Office?

Sometimes your business requires you to work from home which can lead to certain household bills that are not usually considered business expenses increasing. As well as some of the variable costs (electricity, heating) increasing there is also an argument that if the business is operating from the home then some of the fixed costs (rent, mortgage interest council tax) should also be sole trader allowable expenses and included on the self assessment.

HMRC recognise this as a legitimate argument from the self employed and will allow you to claim using your home as an office as sole trader allowable expenses. You’ll need to choose a method to calculate the associated costs and may need to keep the supporting calculation (depending on which method you choose).

What Expenses Can I Claim For?

Below are examples of sole trader allowable expenses that you may be able to claim in relation to your home office:

  • Heating
  • Electricity
  • Council Tax
  • Mortgage Interest Or Rent
  • Internet & Telephone Use
You may also be able to claim for equipment that you need to purchase such as an office chair and desk but we will look at this later in the article under the heading “other sole trader allowable expenses for home office”.
 

Method 1

If you wish to claim a specific proportion of the expenses incurred when working from a home office then you will need to come up with a reasonable method for calculating and dividing the costs between personal and business use. After all the majority of the expenses in relation to running your home will not be business related. HMRC do not specify exactly how this needs to be done but the most common method and the example they use in their guidance is to use the number of rooms in the house in the calculation.

Example

You use 1 room of your home as an office for your sole trader business. Your house has 5 rooms in total (you don’t usually include hallways in the total number of rooms). You work from home 25 hours per week and have summarised the related expenses below:

  • Rent – £1,000 per month
  • Council tax £100 per month
  • Heat & Light – £100 per month
  • Water – £50 per month
  • Cleaning – £50 per month
  • Telephone & Internet – £50 per month
In this example you are spending £1,350 per month on expenses that partly relate to your home office. Although bills such as rent and council tax would have been incurred at the same rate irrelevant of the business use, providing you are setting aside part of your home specifically to be used as an office then these can be included in the calculation as well. 
 
To split these expenses between personal and business you will need to follow the three simple steps highlighted in the calculation below:
 
  1.  Calculate the proportion of the house that you are using as a home office by dividing the number of rooms used for business purposes by the total number of rooms in the house. In our example this would be 1/5 = 0.20
  2. Calculate how often you are using that home office as a proportion of the working week by dividing the number of hours worked from home by the total hours in the week. In our example this would be 25/168 = 0.15
  3. Take the total related home office expenses and multiply them by both the figures above to arrive at the allowable home office expenditure figure. In our example this would be £1,350 x 0.20 x 0.15 = £40.50 per month
You can apply this to the whole year by multiplying £40.50 by 12 (£486) and include this as an allowable expense when completing your self assessment tax return.
 

Method 2

If the calculations above look like too much effort then you’re in luck! HMRC also allow for those operating as self employed to use a simplified calculation as shown in the table below. Using the simplified method means you will just need to estimate how many hours per month you are working from home and then apply the corresponding rate.

It is important to note that the flat rate allowance accounts for a contribution towards rent, mortgage interest, council tax and heat/electric but it does not account for telephone and internet costs which means that if you use this method then you may still be able to claim a proportion of telephone and internet bills by working out the actual costs.

You will also notice that there is no allowance for those who work from home less than 25 hours per week. If you work less than 25 hours per week from home then you will not be able to use this method.

Hours Worked From Home Flat Rate (Per Month)
25 - 50 £10
51 - 100 £18
101+ £26

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How To Choose A Method

The best way to ensure you select the correct method for your situation is to run the numbers and see which method results in the largest allowable expense as this will give you the greatest tax saving. This is the only way to ensure you are really choosing correctly.

If this seems like too much work then remember that as a general rule the higher your monthly related expenses are (rent, mortgage interest, council tax, electricity etc),the more time you spend working from home and the higher the proportion of your house that is used for business the more likely it is that the calculation under method 1 will be more beneficial for you.

Of course method 2 above which involves using the flat rate allowance is a lot quicker and easier to understand so if simplicity is your only concern then it is best to jump straight to method 2 and use the flat rate expense allowance for home offices.

For assistance with making your decision be sure to check out the HMRC simplified expenses checker.

Varying Working Hours

If you, like many self employed business owners experience fluctuating working hours then you may be wondering how this will impact your calculation. Many of our ecommerce clients can work 80 hours one week and 30 the next. So would they need to track the amount of hours worked from home each week and calculate or reapply the corresponding flat rate?

Luckily the answer to this is no. HMRC are happy for you to average out your working hours across the year when making your calculation and when using the simplified method. This means that this calculation only really needs to be made once per year rather than every month. Having said that, there is no rule against calculating on a monthly basis but of course it would involve considerably more work. The choice is yours!

Record Keeping

Another important consideration is with regard to record keeping as each method has different requirements.

  1.  Method 1 – If you calculate the actual costs involved and then apportion some of that cost to your business then you will need to keep records of this calculation and any supporting documents such as electricity bills, bank statements etc for 5 years after the 31 January submission deadline that follows the end of the tax year.
  2. Method 2 – The simplified flat rate method does not require any supporting documentation. This means that other than noting what rate was used from the table and an estimate of how many hours were worked from home, you would not need to keep supporting documents such as electricity bills and bank statements.
 

Other Sole Trader Allowable Expenses For Home Office

You’ll notice that the calculations and allowances discussed above don’t cover all office related expenditure. For example you may need to purchase an office chair and desk to work at if the office setup is new. You may also need to invest in a computer or laptop. These expenses are usually wholly allowable and do not need to be included in the above calculations.
 
If you ended up purchasing any assets for your home office that you make significant personal use of then you may need to consider the income tax implications of this. You can learn more by reading our article what is a benefit in kind?
 

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Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

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