Home Office Expenses

In a Nutshell

Don't miss out on any expenses opportunity

In a Sentence

A simple way of reducing your tax bill by claiming what's right under your nose.

If, like most contractors who manage their own limited company, you are an employee of your company all you need to do is have in place a formal rental agreement.

Contractors (employees) can rent their home office to their limited company at commercial rates. The rate would be naturally greater than the minimum rate of £3 per week which HMRC permit.

Landlord & Tenant

Renting an office is a perfectly correct business expense any limited company will face. The only documentation required to form a landlord/tenant arrangement is a commercial rental licence.

The licence would be between the contractor as an individual homeowner and the limited company which needs an office. The rent will reduce the limited company's Corporation Tax.

Rental License

As a homeowner and limited company employee simply create a written rental licence, setting out a commercial understanding, between yourself and your limited company. It will specify how much rent the company will pay you for the use of the office.

Contractors should ask their limited company accountant for a draft rental licence template. This will save on legal fees and ensure the contract T&C's are compliant and correct.

Realistic Rates

Don't start thinking you can charge City of London rates for a bed-sit in Middlesbrough. The whole principal underpinning this rental arrangement is that it is a commercial arrangement.

The rental rate needs to be realistic. If anything, the rental rate should be lower than the market price for your area.

Working it Out

For maximum benefit, the rate needs to be at a level to cover your expenses while reducing your income tax. And remember, there is no National Insurance payable on rental income.

The other main advantage to this arrangement is the limited company can reduce its Corporation Tax by off-setting this legitimate expense.

Calculation

Use HMRC's suggested method for sole-traders to work out what you should be charging your limited company. Err on the side of caution if you're in any doubt.

As an example, the homeowner charges an annual rent of £1,100 to the limited company, and you've worked out that the HMRC home office expense is £750. You get a profit of £350. Only the profit is taxed (no NIC charge) not the whole of the rental income.