Simplified deductions where your business is based at home

Many small businesses are run from home. Where a business is run from home, household costs will be incurred which are attributable to the business. These may include additional costs of gas and electricity to provide heat and light to the home office or workshop and to power the computer or equipment, the costs of additional cleaning, and suchlike.

Expenses which are wholly and exclusively incurred for the purposes of the business can be deducted in working out the profits of the business. This will inevitably involve a certain amount of record keeping in order to identify what those expenses are. As far as household bills are concerned, it is permissible to deduct a proportion of the total household expenses in computing the business profits, with the apportionment being made on a ‘just and reasonable’ basis.

Claim simplified expenses instead

Businesses can save themselves the hassle of working out the proportion of household costs that relate to the business by instead using HMRC’s simplified expenses to claim a deduction for the costs of working from home. The deduction is a set amount per month, depending on the number of hours worked at home on the business each month. The hours include not only hours worked by the proprietor, but also hours worked in the home by any staff.

The monthly deduction is shown in the table below.

Hours of business use per month Monthly flat rate deduction
25 to 50 £10
51 to 100 £18
101 or more £26

The simplified expenses do not cover telephone and internet costs, in respect of which a separate deduction can be claimed.

Example

Luke is self-employed as a graphic designer. He runs his business from his house.

He normally works at home for 120 hours a month, except in August when he works 20 hours and December when he works 60 hours. He is able to claim a deduction for the year of £288 (being 10 months @ £26, one month @ £10 and one month @ £18).

Actual or simplified?

While claiming a deduction based on simplified expenses is a lot less hassle, it may not necessarily give the greatest deduction. Where the trader thinks the time spent working out a deduction based on actual costs is worthwhile, only they can decide.

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Jointly-owned property – who pays the tax?

Where property is jointly-owned, the way in which the rental income can be split between the joint owners for tax purposes depends on whether the joint owners are married or in a civil partnership or not.

Married couples and civil partners

Where a property is jointly owned by a married couple or civil partners, the basic rule is that the rental income is split equally, regardless of the actual underlying ownership.

Example

Tom and Richard are married. They jointly own a flat in which Tom has a 70% stake and Richard has a 30% stake. The flat is let out. The rental profit is £8,000 a year.

Despite owning the property in unequal shares, Tom and Richard are both taxed on 50% of the rental income (£4,000).

However, where the beneficial ownership is unequal, the couple can elect (on Form 17) for the income to be assessed for tax purposes in accordance with their actual beneficial shares. In the above example, were Tom and Richard to make a Form 17 election, Tom would be taxed on rental profits of £5,600 (70%) and Richard would be taxed on £2,400 (30%).

For married couples and civil partners, the only permissible allocations are 50:50 (the default position) and, on the making of a Form 17 election, in accordance with actual ownership where the property is owned in unequal shares.

Joint owners who are not married or in a civil partnership

Where a property is owned jointly by individuals who are not married or in a civil partnership, it is usual for the rental income to be allocated in accordance with the ownership share. However, the joint owners can agree to a different division of profits and losses – the allocation for tax purposes does not have to mirror the actual ownership of the property. However, where a different allocation is agreed, the split for tax purposes must match the actual allocation of rental profits.

Example

Jake and his girlfriend Jade jointly own a flat which they let out. Jake owns 20% of the property and Jade owns 80% of the property. The rental profit is £10,000 a year.

Jade has £3,000 of her basic rate band available, whereas Jake has £9,000 of his basic rate band available. Therefore, to minimise the tax payable on the rental income, they agree that it will be shared so that Jade receives 30% (£3,000) and Jake receives 70% (£7,000).

Where joint owners are not married or in a civil partnership it is possible to agree an actual allocation that minimises tax. However, depending on the relationship between the owners, the tax considerations may be secondary as each owner may be keen to receive a share of rental profits proportionate to their actual stake in the property.

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Using the cash basis – is it for you?

The cash basis is a simpler way of working out taxable profits compared to the traditional accruals method. The cash basis takes account only of money in and money out – income is recognised when received and expenses are recognised when paid. By contrast, the accruals basis matches income and expenditure to the period to which it relates. Consequently, where the cash basis is used there is no need to recognise debtors, creditors, prepayments and accruals, as is the case under the accruals basis.

Example

Ben is a self-employed plumber. He prepares accounts to 31 March each year. On 28 March 2019 he fits a new shower, invoicing the customer £600 on 29 March 2019. The customer pays the bill on 7 April 2019.

He purchased the shower for £400 on 25 March 2019, receiving an invoice from his supplier dated the same date. He pays the bill on 8 April 2019 after he has been paid by the customer.

On the cash basis, the income of £600 and expenditure of £400 fall in the year to 31 March 2020 – they are recognised, respectively, when received and paid (in April 2019). By contrast, under the accruals basis, the income and expenditure falls into the year to 31 March 2019 as this is when the work was done and invoiced.

Who can use the cash basis?

The cash basis is available to small self-employed businesses (such as sole traders and partnerships) whose turnover computed on the cash basis is less than £150,000. Once a trader has elected to use the cash basis, they can continue to do so until their turnover exceeds £300,000. These limits are doubled for universal credit claimants.

Limited companies and limited liability partnerships cannot use the cash basis.

Advantages of the cash basis

The main advantage of the cash basis is its simplicity – there are no complicated accounting concepts to get to grips with. Because income is not recognised until it is received, it means that tax is not payable for a period on money that was not actually received in that period. This also provides automatic relief for bad debts without having to claim it.

Not for everyone

Despite the advantageous associated with its simplicity, the cash basis is not for everyone. The cash basis may not be the right basis for you if:

  • you want to claim a deduction for bank interest or charges of more than £500 (a £500 cap applies under the cash basis);
  • your business is more complex, for example, you hold high levels of stock;
  • your need to obtain finance – banks and other institutions often ask for accounts prepared on the accruals basis;
  • you want to claim sideways loss relief (i.e. set a trading loss against your other income) – this is not permitted under the cash basis.

Need to elect

If the cash basis is for you, you need to elect for it to apply by ticking the relevant box in your self-assessment return.

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Amending your tax return

The deadline for filing the 2017/18 self-assessment tax return of 31 January 2019 has now passed. You filed your return on time and paid the tax that you thought was due, but you know realise that you have made a mistake. Is it too late to correct it, and if not, how do you go about it?

Time limits

A tax return can be amended once it is filed – but you only have 12 months from the filing deadline in which to file an amended return. This means that you have until 31 January 2020 to file an amended 2016/17 return where it was filed online. However, if you have found a mistake in your return for 2017/18 or an earlier year, it is no longer possible to file an amended return. Instead, you will need to write to HMRC telling them about the error and advising them of the correct figures.

Correcting the return

If you are in still in time to file an amended return (for example, you want to amend your 2017/18 tax return), the mechanism for amending the return depends on whether you filed online or whether you filed a paper return.

If you filed your return online, you can amend your return online too. To do this, you need to log into your HMRC online account and select the self-assessment from the home ‘at a glance’ page. Under the heading of ‘returns’ it will tell you that you have completed your self-assessment return for the 2017/18 tax year, and provide a number of options, including an option to ‘Amend Self-Assessment return for year 2017 to 2018’. Selecting this option, provides a number of options for amending the already-submitted return, asking the taxpayer if they would like to:

  • add a new section to your submitted return;
  • amend figures already submitted;
  • delete a section from your submitted return;
  • add/delete a section and/or amend a figure; or
  • return to tax return options.

From there it is simply a case of selecting the appropriate option, amending the return to show the correct figures and filing the amended return.

If the return was filed using a commercial software package, check whether is facilitates the filing of amended returns. If this is not possible, contact HMRC.

Where a paper return has been filed, the 12-month amendment window runs to 31 October after the filing deadline (as an earlier deadline applies to paper returns). To amend a paper return, download a new return, complete it correctly, and send it to HMRC.

Pay more tax or claim a refund

Amending your tax return will also change the amount of tax you owe. If it is more, you will need to pay this, plus interest (which runs from the due date of 31 January after the end of the tax year). If your tax bill goes down as a result of the amendment, you can claim a refund – but remember you only have four years from the end of the tax year to which it relates in which to do so.

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Don’t pay for expenses that your employer should be paying for – here’s how and when to claim a tax deduction.

Employees – claim a tax deduction for expenses

Employees often incur expenses in doing their job – this may be the cost of a train ticket or petrol to visit a supplier, or purchasing stationery or small tools which are used in their job. Employers will frequently reimburse the employee for any expenses that they incur, but where such a reimbursement is not forthcoming, the employee may be able to claim a tax relief.

The test

Employment expenses are deductible only if they are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. The test is a harsh test to meet; the ‘necessary’ condition means that ‘each and every’ jobholder would be required to incur the expense. Consequently, there is no relief if the expense is not ‘necessary’ and the employee chooses to incur it (even if the ‘wholly and exclusively’ parts of the test are met). The rules for travel expenses are different, but broadly operate to allow relief for ‘business travel’.

In the performance of the job v putting the employee in a position to do the job

A distinction is drawn between expenses that are incurred in actually performing the job and those which are incurred in putting the employee in the position to do the job. Expenses incurred in travelling from the office to a meeting with a supplier and back to the office are incurred in performing the job. By contrast, childcare costs or home to work travel are incurred to put the employee in a position to do the job. Relief is available only for expenses incurred as part of the job, and not for those which incurred, albeit arguably necessarily, to enable the employee to do the job.

Expenses for which relief may be claimed

A deduction can be claimed for any expense that meets the ‘wholly, exclusively and necessarily’ test. Examples include professional fees and subscriptions, travel and subsistence costs, additional costs of working from home, cost of repairing tools or specialist clothing, phone calls, etc.

Where the expense is reimbursed by the employer, a deduction cannot be claimed as well; however, the amount reimbursed is not taxable and is ignored for tax purposes.

Using your own car

Where an employee uses his or her own car for business travel, the employer can pay tax-free mileage payments up to the approved rates. For cars and vans, this is 45p per mile for the first 10,000 miles in the tax year and 25p per mile for any subsequent miles.

If the employer does not pay mileage allowances or pay less than the approved amount, the employee can claim tax relief for the difference between the approved amount and the amount paid by the employer.

Flat rate expenses

Employers in certain industries are able to claim a flat rate deduction for certain expenses in line with rates published by HMRC (see www.gov.uk/guidance/job-expenses-for-uniforms-work-clothing-and-tools#claim-table). Although claiming the flat rate removes the need to keep records of actual costs, employees can claim a deduction based on actual costs where this is more beneficial.

How to claim There are different ways to make a claim depending on your circumstances. Claims can be made online using HMRC’s online service, by post on form P87, by phone or, where a self-assessment return is completed, via the self-assessment return.

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