by J.D. Rainey of Finmo
A simple google search or a few phone calls to accountants will turn up a lot of lists about what you can and can’t write off as a business expense. However, many of these lists tend to stay away or gloss over the toughest and most confusing bits of HMRC’s tax rules.
If you haven’t read our first blogs in this series – three things to do today, you may want to do that.
And, a little about Finmo – our story just in case you’re interested.
Now, to get to it.
The question comes up a lot. Can I write off part of my rent or mortgage if I work from home? The answer is most likely yes.
As a sole-trader, the complication comes when calculating how much to write off. HMRC describes two ways to calculate this.
Simplified expenses come into play if you only work from home a few hours a week (to catch up on bills, etc.) or if you pay a very small amount in rent or mortgage. You can learn about the specifics here.
A flat weekly rate is assigned to the time you work from home and is multiplied by the number of weeks you work from home.
Typically, this won’t net you much of an impact to your tax bill, so the more complicated method is writing off a portion of your actual household expenses.
The most important bit about writing off part of your household expenses is the word ‘reasonable’. HMRC says, “You’ll need to find a reasonable method of dividing your costs, for example by the number of rooms you use for business or the amount of time you spend working from home.” More in the working from home section of this HMRC article.
Another example of a formula you can use is:
Total household expenses multiplied by the dedicated space in your home used for work multipled by the percentage of time that space is used for work. So, the calculation:
Add up Rent or Mortgage interest + heating + electricity + Council Tax
(Number of rooms used for self-employed work / Total number of rooms in the house)
Amount of time used for work / (Amount of time used for work + amount of time used for personal use)
To give this more of a real life example: Joan has an extra room she uses for an office. 90% of the time, that extra room is used as an office for her self-employed job, while 10% is used when guests come over. The extra bedroom is one of five rooms (20% of the house) so Joan multiplies her monthly household expenses times 90% times 20%.
Writing off portion of rent or mortgage interest is one of the best ways to save money and decrease the amount of tax you pay.
Finmo works with our Members to find the formula that works best for them.
There are some downside risks to this method, specifically with regard to claiming a business only area of a house that you own and are claiming mortgage Interest. We go into more detail here.
If you use your phone for work purposes, you can write off a portion of your phone bill.
As with household expenses, your phone sits firmly in the Statistical Approach category.
Estimate how much time you spend on your phone for work versus personal. The Reasonable-ness concept comes into play as well. So don’t overdo it.
The question often comes up – when I travel, what can I write off?
Before answering that question, you have to answer the question, What is travel and what is not travel? And what is subsistence?
Let’s start with travel. Or rather, what is not travel, ie. Your place of work.
HMRC says the ‘place at which an employee works is a permanent workplace if he or she attends it regularly for the performance of the duties of the employment. … By contrast, ‘A workplace is a temporary workplace if an employee goes there only to perform a task of limited duration or for a temporary purpose.’
Within this definition, travel is when you work from someplace that is not your permanent workplace.
Do you work from home and sometimes go into an office? Or do you work from an office and sometimes work from home? There is a huge difference in those two seemingly similar statements. The first, you write off travel and subsistence to and from an office and the second, you don’t. In both cases, you can write off the cost of your home office.
Confusing, I know. This is why we’re here and why having an accountant is important.
Subsistence expenses are costs like: business travel, meals, hotels, sundry items such as laundry (though usually only on long trips) and similar ad hoc expenditures.
All of this means that when you ‘travel for work’ – ie. Work someplace that is not your permanent workplace, you can claim expenses for almost everything you do. Travel (train, car, tube, plane, etc.), meals, overnight stay, the cost of your mid-day coffee are all business expenses when you are away from your permanent workplace.
You may want to re-think the next time you use that phrase. From a tax perspective, it is MUCH better to split the bill.
As mentioned above, you can claim subsistence as a business expense. This is the cost of your own meal. If you are at a business lunch, no problem, the cost of your meal is okay to expense.
However, if you pick up the tab for your client, it is not a tax deductible expense.
In our example above, if you split the bill twice, you can write it off both times. If you get one and your client gets the other, both of you are down one meal from a tax standpoint.
Like a good first date, split the bill.
The tax deductions are in the details!
Many industries have governing bodies, unions or associations. These associations are ripe with industry specific information and how it pertains to you. Taxes are often a pain point and one that is covered in detail.
If you can’t find your governing body, a lot of accountants will give a 15 minute ‘free’ session to talk you through what you can write off and what you can’t. Note: in January, this may not happen as Accountants tend to be too busy.
What other questions do you have?We are always looking for topics to write on. What else do you want to know? Message us on our site or e-mail at firstname.lastname@example.org and let us know.