Can i charge my business rent for my home office

What is Deductible

Deductible business expenses reduce your company’s taxable income and the amount of tax you need to pay.     

Example

Generally, deductible business expenses are those 'wholly and exclusively incurred in the production of income'. In other words, they must satisfy all these conditions:

• The expenses are solely incurred in the production of income.
• The expenses are not a contingent liability i.e. they do not depend on an event that may or may not occur in the future. In other words, the expenses must be incurred. An expense is 'incurred' when the legal liability to pay the expense arises, regardless of the date of actual payment of the money. 
• The expenses are revenue, and not capital, in nature.
• The expenses are not prohibited from deduction under the Income Tax Act 1947.

Learn more about the tax deductibility of expenses by watching our e-Learning video.

What is Non-Deductible

Non-deductible business expenses are activities you or your employees pay for that do not fulfil the conditions above. These include personal expenses (such as travel, or entertainment not related to the running of the business) and capital expenses (such as expenses incurred to incorporate a company and the purchase of fixed assets).

Learn how to make tax adjustments (such as adding back non-deductible business expenses) to arrive at the income that is chargeable to tax.

Examples of Deductible & Non-Deductible Business Expenses

Learn more about the tax treatment of business expenses:

Further/ Enhanced/ Double Deductions

There are various tax schemes that provide for further/ enhanced/ double deductions on qualifying business expenses.

Rent is any amount paid for the use of property that a small business doesn't own. Typically, rent can be deducted as a business expense when the rent is for property the taxpayer uses for the business.

Here are some things small business owners should keep in mind when it comes to deducting rental expenses:

Lease or purchase

• Sometimes a business must determine whether its payments are for rent or for the purchase of the property, because different tax rules may apply.
• Businesses must first determine whether an agreement is a lease or a conditional sales contract.
• Payments made under a conditional sales contract aren't deductible as rent expense.

Unreasonable rent

Businesses can't take a rental deduction for unreasonable rents paid. Rent is unreasonable for deduction when it is higher than market value or a professional appraisal.

• Usually, unreasonable rent becomes a problem when business owners and the lessors are related.
• Rent paid to a related personPDF is reasonable if it's the same amount a business owner would pay to a stranger for use of the same property.

Office in the home

A business owner's workplace can be in their home if they have a home office that qualifies as their principal place of business.

As we have already mentioned in our earlier article, it is possible for directors to claim a work from home allowance under HMRC rules.  This allows the director to reclaim an element of the running costs of the work from home office space. Unlike the self-employed, directors are not allowed to claim for a proportion of rent or mortgage interest. They are however, allowed to charge rent to the company for the occupation of the property.

The ‘commercial’ rental income must be declared in the land and property section of the director’s personal tax return.

• If the rent is charged at the same rate as the proportion of costs, then income will be offset by costs and there will be no rental profit to declare.
• If the income exceeds costs, there will be a taxable rental profit declared on the tax return.

A rental agreement should be put in place to evidence the commercial arrangement between the director and the company. The director then becomes the company landlord and is allowed to charge rent. the commercial agreement then allows the director to declare a proportion of costs in their personal tax return.

Rental income is not subject to National Insurance which makes it an effective way of withdrawing money from your business.

Setting up a formal agreement

• A non-exclusive licence may be created for the company to occupy an office during their trading hours – typically a home office is available for family or personal use outside out of trading hours.
• The intention to enter into the agreement should be evidenced in Board Minutes.
• The agreement should be put in place before or at the point of occupation and not backdated, and must be in joint names (affecting both landlords personal tax returns) if the property is joint owned.
• Rent may be below but should not exceed local  commercial rates or it may be viewed by HMRC as being disguised distributions to the directors.
• Rent can include service charges for the incremental costs of heat, light and power etc.  These should be calculated to reflect proportional costs so they don’t create a gain in your personal tax return.
•  The householder should make sure that they are allowed to enter into such an arrangement with their mortgage provider, landlord and they should also make sure that the agreement would not affect their own household insurance.

Consider:

• The rental licence must be justified and the director must be able to evidence that they genuinely work from home and these costs are incurred wholly and exclusively for the purpose of running the business.

To licence or lease?

A non-exclusive annually renewable licence for the use of a home office is far more flexible and forgiving than a formal lease which is governed by the Landlord and Tenant Act which could have Capital Gains Tax and Business Rates implications. If you are leasing substantial or separate buildings then a lease formal lease agreement would be appropriate and you would need to consult a lawyer to draw up the agreement.

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