Working from Home Expenses for Personal Service Companies
Written by Sally Fletcher for plan.it, June 29 2011, updated April 6 2012
Please note, the following relates to Personal Service Companies (PSCs) only, not other business organisations where the criteria for home working arrangements between employee and employer are different.
For directors (referred to as the employee in this note) who provide their services via a PSC, there will usually be a requirement to carry out small administrative procedures from the home, such as raising invoices and keeping accounting records up to date. According to guidance from HMRC, this is classed as not substantive duties of employment.
In these circumstances, HMRC allow a fixed rate of £4 per week to be claimed against corporation tax without the need for supporting documentation or a dispensation. Please note that this £4 per week does not include the cost of any business telephone calls made. In order to offset any business calls made, documentary evidence is required.
A dispensation is an authorisation given by HMRC to remove the need for reporting expenses and benefits paid to employees, such as subsistence, mobile phone, accommodation etc on the annual forms P11d or P9d. There is no requirement for the employee to pay tax or National Insurance contributions on items covered in a dispensation.
There are stringent rules that need satisfying before a dispensation will be granted. One of which is to have all expense claims independently checked and verified. In the case of a one director limited company, these rules cannot be satisfied. However, where there is an employed spouse or partner in the company who acts in an administrative capacity, it's possible that that this person could independently check and verify expenses claims and therefore HMRC may then grant a dispensation.
Home is the workplace
Home working expenses that you wholly, exclusively and necessarily incur in the performance of your duties and which exceed the HMRC allowable £4 per week may be allowable against corporation tax providing you can prove that the home is a workplace because the following conditions have been met:
- The duties are substantive duties for the employment.
- No suitable client premises are available at the client or the premises are closed.
- The duties cannot be performed without the need for suitable home premises.
- There has been no preference of choice made by the employee as to where the duties are performed.
1) Substantive duties of employment
Substantive duties of employment are those that are carried out by the employee that represent all or part of the central duties of the contract undertaken with the client. It is the carrying out of these duties that generate the income of the company.
As explained above, the administrative duties required of a director and other minor clerical duties undertaken are deemed not substantive duties of employment.
2) Suitable client premises
Often the schedule to the contract will dictate that the employee is required to undertake the duties from the client's premises; even though, they may not need to adhere to any set working hours. Where the employee, with the express permission of the client, chooses to work from home, the conditions to reclaim home expenses are not met as the client premises are available to work from and therefore they were unnecessarily incurred expenses.
3) Suitable home premises
Where there are no suitable client or other premises to work from or it would be unreasonable to expect the employee to travel because of the distance, there is a need to work from home. However, the home premises must be suitable to enable the duties to be undertaken, for example, all necessary equipment and utilities are available. Suitable in these terms means a room set aside specifically to perform the duties that nobody else occupies.
4) Preference of choice
With current technology, many people are now quite able to perform their duties from home without the need to be site based. Where the employee has chosen, either before or during the contract, to work at home in preference to on site, the expenses are not allowable.
For those who can satisfy the rules that the home is a workplace, it is advisable to keep all contracts and schedules as evidence that it was a wholly, exclusively and necessary expense to work from home in the performance of your duties.
Expenses that qualify
Eligible expenses are those that have been incurred above what would normally be charged for general living costs, including:
- units of gas
- units of electricity
- units of water for metered water only
- business insurance
- business telephone calls
- dedicated business internet connection
- dial up broadband (dongle)
- business rates if applicable.
Expenses that do not qualify
The following expenses are generally a fixed flat rate fee that has to be paid irrespective of whether a business is carried out from home:
- council tax
- water rates
- mortgage interest or capital repayments
- landline telephone line rental
- household broadband connection rental.
Prior to 2005/06, council tax, mortgage interest and rent were allowable.
Calculating the additional costs
There is no specific guidance from HMRC on how to calculate business expenses separated from normal living expenses. HMRC specify that the business expenses claimed should be the "additional costs" and that "they expect records to be kept to show how the figure has been calculated". Therefore, we conclude that you will need to record the actual units used on the meters.
This brief is for guidance purposes only. In all cases we would recommend that you discuss any queries with professional advisors. plan.it Services is a firm of Chartered Accountants regulated by the Institute of Chartered Accountants in England and Wales. Please feel free to contact us if you have any questions relating to this article or other accounting issues affecting contractors.