Business expense claims - New rules on claiming mortgage interest

HMRC have started to allow self employed people to offset mortgage interest and other fixed costs against their annual tax bills, something which accountants have previously advised against doing due to the capital gains tax implications.

Self employed people who run their businesses from home could well benefit from updated guidance to the HMRC "Business Income Manual".

Accountants have typically warned against offsetting mortgage interest against tax, as the owner could become liable to CGT as a result, even if the property was the only residence owned. The new rules put an end to this possibility. This is the first time this has been officially clarified by HMRC.

The updated guidance also provides guidance on what other expenses can reasonably be re-claimed by homeworkers. HMRC make it clear that claims need to be "reasonable" and the examples provided are not intended to be prescriptive as each taxpayer's case will be dependant on the facts.

Reclaiming Expenses - HMRC Examples

Example 1

Angela writes up her business records at home. She uses a room solely for business use for a short period each week. She estimates that £104 covers the cost of the proportion of the establishment costs, plus the electricity for heating and lighting.

Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary.

Example 2

Bill runs a small business. He uses one small room at home as an office, exclusively for the purposes of his trade (CG64660). The room represents 5% of the floor area of the house.

His Council Tax, insurance and mortgage interest bills total £4500. He claims 5%, £225.

His electricity bill for heating & lighting is £300. He claims £15, which is 5% of the total.

His total claim is £240 (plus the business proportion of his phone bill).

Although Bill has apportioned his electricity bill by floor area rather than usage, the amount claimed is small and there is nothing to suggest that his business use is significantly greater or lesser than his private use. It can be accepted as a reasonable estimate.

Example 6

Gordon, an architect, dedicates a room solely for use as his office between 9am and 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for an average of 4 hours each day, though often this is spread over his working 8 hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours.

The room is available for domestic use outside of business hours and his family regularly make use of the room for around 2 hours each evening.

After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable costs (£200) and 8/10 of fixed costs (£480).

The claim equates to 75% of the total costs attributable to the room (£680/£900), which Gordon views as a more straightforward but equally reasonable basis for future claims, should his circumstances remain unchanged.