Charging your company rent for office space
Many contractors, because of the nature of their business, choose to operate from home. As such, it should be possible to establish a claim for tax relief on part of the home expenses.
It is important to put in place a formal rental agreement between the company and the director (or husband and wife if the property is jointly owned). Failure to do so allows HMRC to regard any rental payment as extra salary from which PAYE and NIC should be deducted. The agreement should be non-exclusive and also supported by a company minute that verifies their intention to rent on this basis and that the rental charge is not considered to be greater than market rate for a similar space.
Where the rent charged is substantial, then it is recommended that it is compared to rents charged by local serviced offices and a note recorded. Serviced office rents are normally based on the size of office space and generally include utilities and insurance, therefore making the comparison a fair and reasonable one. If the rental charge is similar then this will satisfy the market value test, as the company can only secure corporation tax relief for rents provided the rents do not exceed a commercial arm’s length amount.
To protect the loss of Capital Gains Tax Principle Private Residence Relief, should the home be sold at a future date, then it is advisable to stipulate in the rental agreement that facilities are only let to the company for designated hours each week, e.g 09:00 – 17:00, Monday – Friday.
Example 1 – Alex (owns property)
Alex is an IT contractor who uses a dedicated room in his home as his office, Monday – Friday, 9 am – 5 pm. The room contains the normal office furniture plus IT equipment. He uses the room, on average, for 4 hours each day, although this is spread over his 8 hour working day.
The room is available for domestic use outside of the prescribed business hours and his family use the room for approximately 2 hours each evening.
Alex lives in London and his study is one of 8 rooms in his house, ie 12.5% of the total. His mortgage is £300,000 and he calculates the annual rental costs as follows:
| Mortgage interest (£1,000 p.m) | £12,000 |
| Council tax | £3,000 |
| Property insurance | £1,000 |
| £16,000 | |
| Proportion relating to study (12.5% of floor area) x 8 out of 10 hours | £1,600 |
| Add: utilities (relevant proportion), say | £400 |
| Annual rental charge | £2,000 |
In the above example, Alex’s company will claim a deduction of £2,000 in their annual accounts and Alex will declare rental income of £2,000 with a matching expense of the same so as to reduce the net rents to nil, on his Self Assessment tax return.
Example 2 – Vicky (rents property)
Vicky is the sole director of her own management consultancy business. She rents a two-bedroom property in London and uses one of the bedrooms exclusively for her business. The bedroom is one of five rooms in the flat, so a 20% deduction is available.
Vicky calculates the annual fixed costs as follows:
| Mortgage interest (£1,000 p.m) | £24,000 |
| Council tax | £3,000 |
| Property insurance | £1,000 |
| £28,000 | |
| Proportion relating to study (12.5% of floor area) x 8 out of 10 hours | £5,600 |
| Add: utilities (relevant proportion), say | £400 |
| Annual rental charge | £6,000 |
HMRC offer a flat rate home office deduction of £4 p.w when an employer pays an employee for home working costs. For a contractor who spends the majority of their working time away from their home office and only carries out limited administrative tasks at home during the evening, this may well be reasonable. However, for a freelancer that spends the majority of their time working from home, HMRC’s fixed rate is inadequate.
It is important that home office claims are fully supported by information used to calculate the rental charge to the company and that the calculation is reviewed on a year-by-year basis to check whether circumstances have changed.
I think a degree of care needs to be exercised when recovering a proportion of mortgage repayments as it could give rise to a capital gain in the event that the house is sold, even if it is the only residence owned.
I think is why they specifically declare that it is only a percentage share of mortgage INTEREST…. not the whole mortgage… otherwise yes, there would be a company share in the in the property’s capital value that would be liable for captital gains tax, etc. e.g. I have just taken a much lower interest mortgage, but reduced the length of the mortgage (from 25y to 20y)…. the total monthly payment to the bank is almost exactly the same, however the amount I can claim as rent is reduced as I’m now paying off more capital and less in interest.
I am bit confused about second example as it doesn’t adds up. It seems up the first column information is copied from first example and second column information is relevant to second example.
I am very confused as to why you have to do any kind of calculation to work out rent. If I wanted to hire or rent an office then I would have to pay the going rate for one. It would be irrelevant whether they had a mortgage or other costs – market forces set the rent. So if I am renting surely I need to find out what the going rent is for an office of similar size and charge myself a bit less than that?