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The economic downturn will result in more business owners working from home, according to Target Chartered Accountants.
However, whether they are established businesses which are giving up their office space as part of a cost-cutting programme or people who have been made redundant and are setting up by themselves, they should ensure they are claiming tax relief if they are to enjoy the full benefit.
Andrew Wilson, head of corporate and business tax with Target in the Midlands, explains: “Business owners who use their home for business purposes can claim a proportion of the costs - even if it is only for one room of the house for part of the time, as it usually is for most of them.
“HMRC has recently confirmed that businesses can claim for mortgage interest and for people who do have a large mortgage, the tax relief can be significant. Other eligible costs include rental, council tax, home insurance, repairs and energy bills.”
Andrew says that the relief can be claimed by businesses which operate as a sole trader, partnership or limited company. For a company to achieve maximum benefit it should pay an annual rent for partial use of the premises. The company is able to claim corporation tax relief on the rental payments.
While the rental income received is subject to income tax and individuals will need to report it on their personal tax return, as it can be offset by expenses attributable to the business use of the office, in practice there may be little or no tax to pay.
Business owners who do use this strategy should ensure the rent charged does not exceed a commercial rent - this can be checked by having an independent rental valuation by a qualified professional or obtaining comparative charges from a local serviced office. The level of rent should be reviewed annually and invoiced to the company..
Andrew adds: “People are sometimes concerned about claiming relief because they fear that, if they decide to sell their home in the future, part of the proceeds may be subject to capital gains tax.
“This is highly unlikely but, to be on the safe side, you can put in place a rental agreement which specifies that the rooms concerned have an element of both business and personal use. In these circumstances HMRC have confirmed that full Principal Private Residence (PPR) relief should continue to apply, so no capital gains arise.
“Another concern that people raise is that they will become liable to pay business rates. Whether or not you claim tax relief would have no bearing on this – it would depend on an assessment by the Valuations Agency Office, which would take into account factors such as the extent and frequency of the business use and any modifications made to the property to accommodate that. However we are not aware of any instances where a claim for tax relief has led to a business rates assessment.”
Notes to Editors
Target is a ‘top 35’ firm of chartered accountants specialising in owner managed businesses and people who want to maintain and increase their wealth. The firm has offices in the South West, Thames Valley and Midlands. Target believe that an integrated approach means better client service, encompassing audit and accounts, tax reduction, personal financial planning and corporate transactions.
Specialist teams are in place to handle the different needs of large companies, small businesses and private clients. Target is particularly effective in advising shareholding directors who want to realise maximum value from their business. The firm has led and supported numerous corporate transactions ranging in value from £500,000 to £75 million.
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