The benefits of a home office
Personal and financial advantages of having a home office for small business owners
Working from home, WFH and home office are now firmly part of our common lexicon in a way that we never could have imagined. Working from home has become an essential part of the last year throughout the pandemic due to huge numbers of employees being asked to work from home instead of going into the office.
Home office is also something that small business owners might like to embrace too. For some small business owners a home office might have always been part of the set-up but for others it’s worth considering setting one up, even if you have a workshop, office, shop or other designated business space. We certainly have and are not looking back!
Personal benefits of a home office
Despite Covid forcing the hand of most organisations, many people have embraced the concept of home office and are already considering making it a permanent part of their working structure. Others will consider at least a high-bred version of the idea anyway and allow teams to split their time between working from home and going into the office/shop. If we take a look at the upsides it’s easy to see why...
The elusive ‘work-life balance’ has actually become a reality for a lot of people in the last year. Losing a daily commute which some people cite as up to two hours each way a day(!) gifts you back a LOT of time to use in a more rewarding way. Not to mention less knackered!
Personal chores and household tasks can be shared and fitted into the daily routine rather than saved up for precious weekends at no detriment to your working life. Bliss!
Whilst the adjustment of home-schooling and everyone sharing the same space was certainly something that we’ve all had to get used to. Personally, we have found it much easier to manage our family commitments while working from home. We can now pop a load in the washing machine, nip out for the school run and get dinner on without having to take too much time away from our client. These Easter Holidays have been much easier to manage ensuring we get some all important family time while also keeping the business running.
Rapid adjustment to technology
Necessity is the mother of all inventions, or so the saying goes. Due to the ‘stay at home’ mandate, we have seen (almost) all of our small business clients transfer over to 100% cloud-based software systems for managing their business bookkeeping and accounts, reducing the requirement to meet in person.
Whilst many may have felt the transition was a steep learning curve, learn it they have and now they are not looking back!
This has huge implications for the possible future-proofing of their businesses as it enables them to be open to other cloud-based systems that will support their growth, whether that is in marketing, human resources, procurement or any other aspect. Whilst we still feel human relationships are important to us all, the business of running a business can be streamlined using cloud-based software which makes it so much easier to manage, outsource, train new staff and grow. And it’s cost effective too.
As a small business owner, when you are at your place of work, it can be really easy to be drawn into the minutiae of running the business - employees to manage, customers to please, phone calls to answer and emails to respond to. Having a dedicated home office space can provide you with a nice little undisturbed cocoon to focus on developing your business. A few hours of focused time to work on the business instead of in the business is a game-changer.
Over the last year, zoom meetings have become the norm. We’ve seen a huge cultural shift in the way we work and interact with clients and it turns out that it wasn’t so dramatic as we feared. In fact it really helped us to grow faster and support our clients more efficiently. A quick zoom meeting can save hours of back and forth with email, calls or waiting to find a time everyone can meet in person. We’ve been able to offer flexible online training on our preferred platform Xero which has massively helped both parties get up to speed and save a lot of wasted time.
The financial and tax benefits of a home office
We’ve been asked a lot about if having a home office might be financially prudent for a small business owner and our answer is a resounding, YES! If you ensure you do it the right way. We don’t mean decorating your office space, rather how you account for it with your annual tax returns of course!
What expenses can I claim when working from home?
There are two methods to reduce your overheads to account for a home office if this is the place you carry out most of your work - you can’t claim if you also have business premises somewhere else. Simplified Expenses and Calculating a Proportion of Running Costs. We’ll look at each one to see what might be best for you.
If you are a Sole Trade you may use a simple flat rate to reduce your monthly overheads depending on the number of hours you work:
Hrs per month Flat rate per month
25 - 50 £10
51 - 100 £18
101 or more £26
This is applied on a monthly basis so as an example you work 10 months between 25 & 50 hours and the other two months you worked 101 or more you would claim 10 x £10 plus 2 x £26 for the year.
If you are a Director of a Limited Company you may use a flat rate of £6 per week, totaling £312 per year.
Calculating a proportion of running costs
Alternatively you can calculate a proportion of your home running costs to claim tax relief working from home. These are the steps:
Add up your rent or interest you pay on your mortgage (not the capital element, only the interest), utility bills, council tax, insurance (if this also covers your business).
Work out the percentage of your home you use for your business (you can use the floor space to work this out) and how much time you spend in that area for business.
Apply the business percentage you have worked out to your home running costs.
Which method is best?
Of the two above methods - Simplified Expenses or Calculating a Proportion of Running Costs - the former is much simpler to administer yourself and therefore Sole Traders tend to prefer this option. Whereas the latter provides a larger tax relief but it is much more complex to manage and report.
For example, if you have a limited company you would need to have a rental contract between you and your limited company so that the company pays you rent for the space it uses and you as an individual would pay tax on any profit you make from this rental. Therefore, even Limited Company Directors working from home who are administering this themselves tend to use the Simplified Expenses method of £312 per year rate.
Our advice would be to use Simplified Expenses if you are DIYing it but take full advantage of the tax benefits of Calculating a Proportion of Running Costs if you have an accountant to support you. Our clients normally just give us the information and we work it out for them, which saves them time and money.
Mind the tax trap
Some people aren’t aware that selling a property that includes a home office (i.e. includes an exclusive business premise) can leave you open to capital gains tax, which as your main home would normally be exempt.
To ensure that you do not have to pay capital gains tax when you come to sell your property, you must assign your office space as ‘dual purpose’, rather than dedicate it exclusively to business.
For example, assign a room as your office that you also use as a guest bedroom or to store personal items :-)
Other financial considerations of a home office
Internet & phone contacts
If you are a Sole Trader, work out the percentage of business use. Limited Companies should have a separate internet & phone contract in the company name in order to claim these expenses.
Garden office/garage conversion
The cost of building a garden office is not an allowable business expense. Neither is the cost of converting a garage into an office or building an extension for an office. The reason for this is HMRC deem that these structures or additions add value to your home and so shouldn’t create a tax benefit. Shame, huh?
Renovations to your home such as a new roof, windows, plastering etc are also not allowable as a business expense. This comes as a big disappointment to business owners but there are expenses you can claim as tax deductible. Us too. :-(
It’s not all bad news though. New furniture, computers and equipment however can be claimed as tax deductible business expenses. Basically anything that is removable and you have purchased exclusively for the use of your business.
Need more help?
The home office topic is certainly a hot one and we think it won’t be going away. Therefore it is certainly worth considering for any small business owner. For example, it is not unreasonable for the owner of a hair salon to also have a home office to work on the business etc. You don’t need to be a ‘traditional’ office-style business to need an office!
However, you need to consider that from a tax point of view, you can only claim home office allowances if it’s your only place of work. So, if you have a hair salon away from your home plus a home office you cannot claim to ‘Reduce Overheads’. You can, however, claim furniture, computers, etc to go in your home office the ‘New Purchases’ bit we mention above.
GET FREE RESOURCES
We know it’s not that easy to grasp so we have some really useful help-sheets that can assist you to manage this maze of business expenses.
1. Sole Trader Business Expenses
2. Limited Company Business Expenses
Simply fill in your details below to receive them and you'll get an email containing the resources.
Alternatively, get in touch with us to see how we can help you.
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