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Claiming private expenses

This post explores a common issue of claiming private expenses when you operate as a limited company and work from home. This applies for running your business on a full or part-time basis.

The first thing to mention is that the rules are significantly different if you operate as a sole-trader. This is because a limited company is a separate legal entity in law.

This means that invoices in your name (such as broadband if you work at home) cannot be claimed as a company expense because the invoice in not in the business’ name. Your company is NOT liable for your personal contracts and vice versa.

However, your company can pay you personal expenses although you will be taxed on these payments unless you can prove they are wholly, exclusively and necessarily incurred in your work.

The key word is “necessarily” because you NEED to be forced to incur the expenses. The best way to demonstrate this is to have a contract of employment with your company and has a clause that requires you to have a home office with Internet.

If you are being paid expenses from your company without a contract with this clause you are leaving yourself open to an attack from the taxman.

However, there are two issues you need to be aware of by having a contract and the company paying expenses.

The first is that your company (as an employer) will need to complete a form P11D (return of expenses and benefits) at the end of every tax year. You will also need to make a claim for these expenses in your tax return.

This can be avoided by your company applying for a dispensation. This means the company will not need to complete the P11D. And, you will not need to make a claim in your tax return.

The second issue is that if you have a contract of employment you need to pay yourself the national minimum wage. Depending on how many hours you work this maybe higher than the optimal wage for tax planning.

However, there is a simpler strategy that we recommend. This is to have a rental agreement between you and your company.

This agreement is for your company to use your home as an office. Rent is paid from your company to you and there is a deduction in the company accounts, provided the level is commercial. One way to do this is to look at what local business centres are charging.

You will declare rental income on your tax return, but will be able to claim expenses such as a percentage of mortgage interest, house insurance, utilities, council tax and broadband.

This avoids the need for a contract of employment and completing a P11D. It also means you do not need to pay yourself National Minimum Wages for your hours as an employee because you do not have a contract of employment.