As a PR freelancer are you claiming all your tax allowances for working from home? This is a general guide to some of the considerations to help you save money. It’s not tax advice! Seek professional advice before making changes to your tax affairs.
Tax Allowance for PR Freelancers Operating Limited Companies - Home Office Expenses
If you operate your PR freelance practice as a limited company, as of 6th April this year, your company can pay you an increased allowance of up to a maximum of £6 each week to cover additional working from home costs. It isn’t a requirement to keep receipts to show the taxman.
The reality it’s probable that you will have working from home expenses in excess of this.
You can draw up a rental agreement between your limited company and yourself to cover the gap between this standard tax allowance and what you actually incur. The rent should be priced on an arm’s length basis and can include allowances for expenses such as a proportion of your home’s light and heat bills and council tax. This applies to both tenants and homeowners, however it may impact Capital Gains Tax for homeowners.
Capital Gains Tax
A complication for homeowners, is that creating a rental agreement for a room in your house can create a liability to pay capital gains tax when you sell your home. Principal Private Residence Relief exempts you from paying tax on gains on your primary residence, however the relief does not apply to any part of your which is home which is used exclusively for your freelance PR business.
Capital gains can create a tax liability of up to 28% on an increase in value of your home when you sell so it is definitely advisable to obtain professional advice if you are considering going down the route of an agreement between you and your limited company for home office space.
‘Home office expenses’ are taken to include heating and electric bills, rent or mortgage payments, council tax and other utility bills. The treatment of telephone, internet and other consumables and purchases is slightly different. Tax treatment of home office expenses is different for self-employed and limited company contractors so we will look at each separately.
Telephone, Internet and Other Expenses
It’s possible to claim any expenses that are incurred wholly and exclusively for business purposes so equipping your home office with business furniture can be used to offset the company’s tax liability. If you freelance through a limited company, then for tax purposes it is best that phone and internet bills are in the company’s name. If the bills are in your own name or you are self-employed then you need to calculate the portion of their usage that relates to your business.
If You Operate as a Self-Employed PR Freelancer - Home Office Expenses
The picture for self-employed PR freelancer is slightly easier in claiming home office expenses, by adopting either of these methods:
1. HRMC uses flat rate amounts that you can use to claim expenses for operating from home. The flat rate has the advantage that you don’t need to calculate the personal and business use of your home, however the rates are less than generous. The allowances cover fuel and electricity, council tax and mortgage interest or rent but exclude phone and internet charges.
They are based on hours of business use per month:
25 to 50 hours £10
51 to 100 hours £18
101 hours or more £26
These numbers are taken from the HMRC guide
2. The other way is to work out the actual business expenses incurred as result of working from home and keep a record. There is a worked example of how to make the calculation below.
How do you know what costs to record?
If you use this method, the costs you claim should be based on the portion of your house used as an office and then calculate the home office expenses against this, pro rata.
For example, if your home has four rooms and you are currently using one room as a home office for five days a week, you can claim 18% (25% times five days, divided by seven) of your home office expenses.
With Covid-19 forcing far more home working you may be able to argue a higher proportion of energy use. As always when straying away from standard formulas to calculate tax have clear records in case you need to explain it to HMRC.
Capital Gains Tax (again) For Self Employed PR Freelancers
As is mentioned earlier, if you are a homeowner you may incur a capital gains tax liability if you are charging home office expenses against business profits. As Principal Private Residence rules will disqualify any part of your home that is used exclusively for business purposes, you will need to be able to show to HMRC that while you were working in the house, no part of your home was exclusively used for business purposes. If you are a self-employed PR freelancer this may be easier to show compared to running a limited company.
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