The home office may be a room in the home repurposed as an office for part of the time, or it can be a separate building or “pod” in the garden used perhaps entirely by the business. The extent of business use of the area will affect the costs that can be claimed as business expenses.
A home office that is used for most of the time for the business could be let to that business by the home owners, even if it is a room inside the main house. Where there is other non-business use of the area, the rental agreement should reflect the non-exclusive use. Exclusive business use could have implications for the main residence CGT exemption when the entire property is sold.
The rental charge will create a rental income for the home owners that would need to be reported on their personal tax returns. Rent-a-room relief cannot be set against this income as the business is not occupying the area for residential purposes. Also, the £1,000 property income allowance will not apply if the home owners are connected to the business as owners or directors.
As an alternative to rent, the home owner could charge the business a fair proportion of the home running costs: power, insurance and water charges. The apportionment calculations can get quite complex so it may be easier for the business to pay the home owners a flat rate allowance.
Employees and directors can be paid the tax-free home working allowance of £26 per month. Unincorporated businesses can use the simplified expenses if they use the home for business for at least 25 hours per month.
Written by the Tax Advice Network