If you work from home, you may be working as a self-employed contractor for one or more customers or you may be running a business. Alternatively, you may be employed but working from home as opposed to on their premises. It’s important to establish and understand which category you fall into and manage your affairs accordingly.
Working from home as an employee
You’re paid a salary by an employer but work from your home either full or part time. Your employer deals with your tax and national insurance contributions.
They may also contribute to your home expenses such as heating, lighting and broadband expenses and these will vary. If so, you should keep receipts and records as you may be able to claim tax relief on these expenses.
Working from home as a contractor
You’re working for one or more customers on an ‘as required’ basis. You may be paid a flat fee or retainer by certain customers, or paid a fee as and when you undertake work for them.
Either way, you’re self-employed and it’s down to you to arrange to pay the appropriate tax and national insurance contributions. As a self-employed person, you can offset certain expenses against your gross income and tax is calculated on the amount left after expenses have been deducted.
What expenses can be claimed?
Expenses will be appropriate to your business or trade. For example, if you’re a window cleaner, buying buckets, ladders and certain types of clothing (classed as ‘protective clothing’) would be allowable expenses and considered commensurate with your business type.
If you’re a computer programmer and visit clients at their premises, then travel expenses such as motoring (which would include tolls and parking costs), rail fares and even air fares if you can show you have to fly for business could be claimed. Again, these are expenses appropriate to your type of business.
How to determine what are allowable expenses
You can try and work it out for yourself but the best solution is to engage a qualified accountant.
Find an accountant experienced in working with various business clients. Your accountant will be aware of what expenses can and cannot be claimed in your particular trade, and will advise you on how to keep proper records and how to present them each year.
The tidier and more efficient your record keeping, the quicker your accountant can assimilate your figures and calculate your tax liability. This will help keep their fees down as much as possible – although accountancy fees are themselves usually an allowable business expense and therefore ‘tax deductible’.
Your duty to the HMRC (Her Majesty’s Revenue and Customs)
You have to provide a completed tax return each financial year to the HMRC – the tax authorities – which sets out your income, expenditure with expenses details and the amount of tax you’re paying (if applicable).
You can do this yourself, but if you engage an accountant then preparing and submitting the tax return is part of their service. You’ll have a financial year – typically April to April, but this may vary and your accountant can advise accordingly.
If your overall turnover is at a certain level then you have to register for VAT and submit a VAT return every quarter. In a nutshell, you pay the difference over to the HMRC if there’s a VAT surplus (you’ve collected more VAT on your services than you’ve paid out on others) or receive a refund if it’s the other way round.
This of course means you’ll charge VAT at the prevailing rate on your service.
Again, your accountant can provide a VAT service in that they’ll handle the VAT returns, submit them and advise on whether it’s worth your while voluntarily registering for VAT even if your turnover doesn’t reach the required threshold.
Using the home as a business premises
You can usually claim certain proportions of your household running costs as expenses against your business. The theory here is that you’re likely to use more heating, lighting and other services such as telephone and broadband than someone not working from home so expenses are allowed.
You can’t claim entire amounts such as your entire annual heating bill. You’ll likely be able to claim a part of it, and this is where a qualified and experienced accountant can remove the hassle of trying to calculate what is allowable and what isn’t.
For example, a window cleaner may be able to claim a small amount of home expenses. While they’re mostly out and about carrying out their business, a certain amount of time would be spent at home on record keeping and basic customer contact such as making phone calls and replying to email enquiries.
Compare this to someone who is home based for most of their work, such as a self-employed graphic designer; the chances are they’d be able to claim higher levels of expenses for using their home as a business premises.
People running websites and earning commissions from recommending products and services, such as affiliate marketers, and generating income though hosting advertising, such as Google Adsense, on their websites are liable for tax. It’s an area the HMRC are especially turning their attention to – many people these days are making some or even all their income online through basic information websites, e-commerce sites and other online activities such as trading on Ebay and Amazon.
Again, an accountant can help you keep on the straight and narrow as regards the HMRC. Be aware that your expenses for running websites such as hosting, domain name registration and possible design and copywriting costs should be allowable.
Depending on your business activities, there may be implications about paying taxes – sales taxes for example – in foreign countries along with UK taxes depending on where you’re selling to. Your accountant can advise and, if it falls outside their remit, should be able to put you in touch with an appropriate expert.
Business set up
The two basic types are sole trader and limited company.
Sole trader –
you simply register as self-employed with HMRC, set up payment of national insurance contributions, choose a name (whether your own or a trading name) and start trading. It’s advisable to appoint an accountant from the outset.
Limited company –
you set up a company and become a director. Here you have to go through more procedures than for sole trading; you have to register with Companies House, choose a unique company name, and it’s essential that a suitable accountant is appointed.
You effectively become an employee of the company, so it pays you a salary that’s subject to PAYE (pay as you earn) tax and NI (national insurance) contributions.
In order not to fall foul of the HMRC, it’s definitely worth talking to an accountant if you think you may have to wrestle with expenses and tax returns. It can become especially confusing – not to mention risky – if you’re, say, working as a contractor and managing several websites as an add-on to your activities.
A suitable accountant needn’t be overly expensive, and most will outline their fee scales so you can plan accordingly.
Linda Carr is the Founder of Linda Carr Accountants in Peterborough, a Chartered Certified Firm of accountants, which was established in 2009. Linda recognises the need for SME’s to be able to access a reliable accountants for an affordable price.