New fixed expenses for working from home
New fixed expenses for working from home

New rules have been announced that allow the use of ‘simplified’ fixed rate adjustments to the profit figure used to calculate income tax liabilities.

Any individuals who are self employed can use the fixed rates including partnerships.

The fixed rates apply to:

  • business mileage
  • use of home as office, and
  • private use of business premises.

The use of fixed rate adjustments is optional but it may make record keeping a little easier and possibly a larger tax deduction is available compared to the use of actual costs.

You can mix and match, for example, you can use business mileage rates but calculate tax deductible expenses for the business use of the home on an actual basis.

The fixed rates apply for the current tax year 2013/14.

Business mileage

Businesses can calculate allowable expenditure on motor vehicles using a flat rate based on mileage. The rates are:

Cars and vans:  

Up to 10,000 miles

45p per mile

Over 10,000 miles

25p per mile

Motorcycles:

24p per mile

If capital allowances have been claimed on the vehicle, the flat rate cannot be used. This will be an important consideration particularly for a van which may receive a full tax write off in the year of purchase as Annual Investment Allowance (AIA).

In the case of a car, key considerations will be:

  • expected mileage for business use?
  • how much depreciation do you expect to suffer?
  • how many miles per gallon are achieved in the car?

The important point is that the rates given are not dependent on the value and fuel efficiency of the car.

Once the flat rate is used for a particular vehicle, the same method must continue to be used as long as the vehicle remains in the business. Actual costs incurred will not then need to be recorded but certain costs should still be recorded as they may be allowable. For example, tolls, congestion charges and parking fees if they are incurred whilst travelling on business.

If a loan has been taken out to purchase a vehicle, the business proportion of the interest will still be allowable.

Use of home as office

Tax relief is available if part of a home is used, part of the time, solely for the purpose of the business. A flat rate deduction can be claimed instead of recording the actual expenditure on running a home (such as heat, light power, telephone and broadband costs) and calculating a business use proportion. The business use proportion may be quite low and thus give a limited amount of relief. However, HMRC have recently stated that where private use of telephone/internet costs does not form a significant proportion of the service use, they will accept that the full amount of expenditure can be claimed.

If the flat rate is chosen the rates are: 

Number of hours worked per month

Allowable amount per month

25 or more

£10

51 or more

£18

101 or more

£26

The ‘number of hours worked’ is the number of hours spent wholly and exclusively on work done by the person, or any employee of the person, in the person’s home wholly and exclusively for the purposes of the trade.

If you choose the flat rate for a tax year, you can revert to the actual costs basis in another tax year.

Private use of business premises

Where a person uses premises both as a home and as business premises (eg a hotel or a guest house,) the private expenses need to be “added back” to the profits. A fixed scale can be used for the private use so that the business element of the expenses will be relieved.

The taxable profits are after full allowance for all actual expenses and then adding back the non-business use amount, which is the sum of the amounts below for each month, or part of a month, falling within the period.

Number of relevant occupants

Flat rate per month

1

£350

2

£500

3 or more

£650

The flat rate amount is based on how many people (including children) use the business premises each month or part of a month as a private home.

The flat rate includes all household goods and services, food and non-alcoholic drinks and utilities. It does not include mortgage interest, rent of the premises, council tax or rates. A reasonable apportionment of these expenses should be made based on the extent of the private occupation of the premises.

Only premises used mainly for the purposes of carrying on a trade will qualify.

Existing use of a ‘board and lodging’ agreement

Historically, some HMRC offices have entered into ‘board and lodging’ agreements with small hotel and guest house businesses. As some businesses currently using these agreements may need time to prepare for the change, any business which has used a previous agreement with HMRC for the 2012/13 tax year can also use it for the 2013/14 tax year.

Please remember that the fixed rates do not have to be used for all these areas. You have time to consider whether you wish to use any of these rates and we will help you to make that decision when we are considering the submission of your tax return in 2014.

Please contact us if you require any further information or advice.

Kelly Cummings ACCA

Client Manager