October 26th, 2012 / Insight posted in

Home costs set against business

AT writes: My wife and I run a small limited company from home. Would you let us know what expenses we will be able to claim against the profits to reduce our business tax liability without increasing our personal liabilities to income tax? We are particularly thinking of spending on light and heat, council tax and the use of rooms for storage and for an office. We also need to travel regularly to collect goods from a warehouse. Can we claim travel by public transport and the cost of hiring a van to transport the goods?

In calculating your business´s profits you are allowed to deduct any spending you have incurred wholly and exclusively for the purposes of the company´s trade. There is, therefore, a problem when faced with expenses such as the costs incurred in running your business from home because the Inland Revenue will argue that there is a duality of purpose in these costs. These costs will need to be apportioned on a basis that can be substantiated. For instance a valid basis for lighting and heating costs could be the extra costs of running the business from your home. But it would be difficult to apportion any of the council tax to the business due to the fact that there is no incremental cost to the business. Once you have calculated the relevant sums you will need to be reimbursed by your company. This will not result in any income-tax liabilities because you will be simply recovering the costs that you have incurred on behalf of the company. These expenses should be formally documented. The travelling costs to your warehouse and the hire charges for a van should be allowable because they are being wholly and exclusively incurred on behalf of the business. You should be aware that where you designate a part of your home for business use, your principal private-residence exemption for capital-gains tax will be limited to the private area. Therefore you may have a CGT problem in the future and you should be aware of this. Another point to consider is the adequacy of your insurance for the home. You should tell your insurer you are running your business from home. Any additional premium will be an allowable business expense.