Operating your business from home
You can reclaim input tax on some domestic costs if you are working from home regularly or run your business from home. This must be on a reasonable and fair basis. Domestic bills which are not subject to VAT include, water, council tax, mortgage interest and insurance. Bills that are subject to VAT include, heat and light costs and landline telephone bills.
Please be aware that domestic gas and electricity bills are subject to VAT at 5% rather than 20%.
How do you calculate a reasonable and fair basis?
Firstly, you will need to identify which room(s) are being used to operate your business. If the room has any other purpose such as, use of computer by other persons in the household, homework for children then the relevant percentage of use for business must be applied. The manual with HMRC states “An objective test of the extent to which the room is put to business use should be made. “
To apply a fair and reasonable percentage of business use to your costs please complete the following calculation. You will need to add up the total number of rooms in your house, excluding bathrooms, and compare the percentage for one room from the above calculation to the total.
Input tax can also be reclaimed on purchases of furniture or fixtures and fittings for your home office. This must be restricted for non-business and private use by yourself and other people as above. Any costs where you wish to claim the input tax must be purchased directly by your company, not using personal funds if your business is incorporated.
As an example, James is a consultant working from home using a spare bedroom as an office. This is used by children in the household for homework, a 50% split is reasonable in this case for business and private use. There is a total of six rooms in the house, excluding bathrooms, therefore it is fair and reasonable to claim 8.33% input tax on domestic bills for him. This was calculated as follows, one room for business use divided by six total rooms = 16.66%. Divide this by 50% due to the private and non-commercial use = 8.33% input tax to claim back.
To make use of this opportunity to claim input tax it is not just for sole traders or a member of a partnership. This can also be applied if James trades as a limited company. The main concern is the purpose of the expense for the claim of input tax, rather than the way the entity trades.
If you need to make repairs to your house there is potential for an input tax claim, you will need to justify if there is a part business use for costs. Each cost must be considered on a stand alone basis for this decision. If James, from our example above, needed to rewire his house it would be reasonable to claim 8.33% of the input tax.
If repair work is carried out in the room which you operate the business, you could justify a higher claim. As an example, you would not claim input tax on costs of a new bathroom installation or having the living room redecorated.
It is imperative to take the view of an HMRC compliance officer, should an investigation arise in the future, to determine if your claim for input tax on the repair cost is reasonable and genuinely linked to business use before including it in any VAT returns.
Ensure adequate records are kept showing calculations of how the business percentage has been calculated and invoices of any repair costs, domestic costs, fixtures and fittings, furniture are kept.
Please give Jake a call on 01227277667 or email him at firstname.lastname@example.org to discuss VAT on homeworking costs in more detail.