working from home taxes

Working From Home Tips and Taxes

Linkilaw Home-Based Business, Record Keeping & Taxes

As the Internet has evolved, more and more companies are conducting the greater part of their trades online. We have witnessed revolutionary methods of operating a business – extending far beyond the exposure to your company website achieves.

One innovation, prompted over the past 10-15 years by extended web communications, has been the outsourcing of tasks to independent contractors. This action has virtually freed SMEs (and even substantially larger firms) from the burden of employment taxes and benefits for assistance they may not require long term.

Additionally, the flexible opportunities now offered to many regular employees – who would prefer to working from home – have become more prevalent as well. Growing companies are taking advantage of this benefit, by eliminating costs of premise expansion; using their capital for income production instead. It’s a win-win situation.

Essentially there’s never been a better time to work from home; whether you are starting your own company, or taking advantage of an employed position with flexibility of location.

So, let’s have a look at a few benchmarks for running an orderly home-based operation, as well as the tax advantages you might enjoy while doing so.

WORKING FROM HOME TIPS FOR SUCCESS

Create dedicated office space – Not only will this step allow you to be more organised, but it will give you more credibility with the family. They will be less inclined to distract you if you set boundaries. You may very well be communicating with clients on virtual applications or the telephone throughout the day. Abrupt noises in the background will give away the fact that you are not working in a ‘real office’ environment.

Treat your work like a real job – Working in your pyjamas – or assuming you won’t need a nanny because you’re perfectly capable of multitasking their needs while you work – isn’t a good start. Of course, you don’t need to sport business attire, but do consider you may be taking part in virtual meetings. Furthermore, if you feel professional, it will be conveyed to others – whether on the phone, or in your written words.

Inform others that work is in session – Define your specific undisturbed business hours, for yourself and the family. Consider hanging a clock on the outside of your office door, with a sign showing your next ‘open door’ time. When the door is closed, work is in session; when open, interruptions are allowed.

Schedule regular breaks for yourself – Self-employed people tend to go overboard, working too many hours without proper breaks. Be sure to take the time for a walk outdoors or midday meal; this also allows you to check in with the family and address any issues waiting for your attention. Having a breather is essential to your health, and absolutely necessary to keep stress levels at a minimum.

Keep accurate and consistent records – Retain cash receipts and enter these out-of-pocket expenses on a ledger; reimbursing yourself from the business. Maintain up-to-date check registers (whether manual or with an online system) to track paid expenses as well as deposits of income. Track receivables and payables as well, which are a part of your profit and loss financials. Good records are the foundation of good business, so it’s a habit you’ll want to keep.

EXPLORING TAX ADVANTAGES

You are probably aware that UK business laws must be adhered to, so remember to check in with the HMRC. What home-based workers may not realize is that they can oftentimes deduct several line items from their taxable profits.This will depend upon whether you are an employee who incurs expenses not reimbursed by an employer, or you maintain records of expenditures as the cost of running your own business.

You may claim tax allowances, deducting proportions of certain costs from profits – effectively reducing your tax bill. These costs (or a portion thereof) must be used solely and exclusively for the purpose of doing your trade.

Remember to consult with your accountant for a thorough review of all possible allowances. If there is a property purchase or sale involved, or your income is derived from a partnership or shared-equity company, consult a solicitor the first time around; making sure all the i’s are dotted.

 

HOME-BASED TAX DEDUCTIONS

Here is a ‘short list’ of allowable deductions you may retain from profits, prior to filing your self-assessment tax return:

Office in the Home – Here you are entitled to deduct a percentage of the total expenses for your office ‘space.’ Determine the square footage of the dedicated area, as a percentage of your total livable area. Apply that percentage to all costs necessary to provide the home office environment; from utilities to telephone and Internet, council tax, etc.

Note: Be aware that the future sale of a home, which has been used for an office-in-home deduction, may be subject to an adjustment to any capital gains tax exemption.

Direct Costs – The cost of materials used to manufacture or create products you resell; i.e. cost of sales. Also, you may deduct payments for contracted work which you ultimately retail as a service.

Indirect Costs – Also deductible are administrative expenditures (such as employing an assistant), supplies, shipping, required education and certifications, and proportionate business travel costs – just to name a few.

Equipment – Significant purchases – such as computers or machinery – would count as capital expenditures, qualifying for the AIA (Annual Investment Allowance).

Vehicle Use – If your car is used in the business (or for employer-required travel other than to and from their office or job site) you may deduct a proportionate amount of paid repairs, maintenance and petrol – along with a 25% writing down allowance. Another option is to take the 40p per mile deduction, for up to 10k business miles of use.





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