Tax implications of Home Working

 If you're self-employed, working from home can help keep costs down but there are also tax implications that are worth considering before going down this route. 


Business expenses

In theory, allowing self-employed people to deduct certain expenses from their turnover will give a more accurate reflection of profits, which will make a fairer tax bill.


It is difficult working out what expenses count as allowable, with the basic rule covering expenses incurred ‘wholly, exclusively’ in the running of your business.


Operating out of your home blurs the lines between business and your private life. For example, is your household electricity bill a legitimate business expense? According to HMRC, the correct approach is to make a sensible estimate of the proportion of the bill that applies to your work, and only claim against that.


If you can show that you have acted in good faith, HMRC is usually quite tolerant of sensible guesswork. It is important to keep records of your calculations in case they are queried later, along with the original bills, including phone bills and even gas and heating statements.


Allowable expenses

HMRC’s Business Income Manual sets out in detail what can and cannot be claimed as a business expense by self-employed people. Because of the complexity, each case is usually judged on its own merits.


Simplified expenses claims

If you’re a sole trader and work from home for more than 25 hours a month, the process is streamlined further, thanks to an optional flat-rate system.


It allows you to sidestep some of the detailed calculations and make a claim based on the following thresholds:


Hours of business use per month

Flat rate per month

25 to 50


50 to 100


Above 100



This only applies to utilities and not telephone bills. This is because phone bills can be more easily itemised along with broadband.


Unfortunately, streamlined or not, there may be some calculations to work out. For example, if you worked 60 hours a month from home for eight months (8 x £18) then cut down to 30 hours a month for the remaining four months (4 x £10), you could claim £184 for the year.


A capital gains tax trap? 

If you have a room in your house that you only use as an office, it could reduce the amount of capital gains tax relief you can claim when you sell the property.


This specific part of the property will not qualify as ‘private residence’ and so falls outside the bounds of that particular tax relief.