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The garage was one of the most important rooms for me when we last moved house nearly fifteen years ago. I was self-employed at the time, as a freelance writer, and had made the garage of my previous house comfortable enough to work from.
I did the same in the new house, until that fateful day when I was reading my copy of Taxation from the back, as always, and found they were looking for a new editor.
I have now swapped a few yards walk to work for an hour and a half trek, not improved by the inability of Southern Railways to operate during a normal British winter climate.
How to apportion
But when I was working from my garage, what was I to claim as a deduction for use of home? There was surprisingly little guidance available in the then Inland Revenue manuals, and what there was had stern warnings about not being able to deduct expenses unless incurred wholly and exclusively for business purposes.
I did, I suppose, what most accountants do for their clients, and worked out some apportionments of expenditure, taking into account factors like the extra heating needed in a cold garage, and came up with a relatively conservative weekly figure, considering that I was spending a full working week in there.
Since I can find any amount of detailed advice on obscure issues such as the deduction of expenditure on personal security, the absence until recently of any detailed advice on such a common item as use of home was surprising.
My recollection is that there used to be some in the Inspector's Manual, but the HMRC website, with a welcome sense of humour, now notes that 'after long and invaluable service to the Inland Revenue, followed by a debilitating illness lasting some five years, the Inspector's Manual has been peacefully laid to rest'.
New guidance
But all that has changed. After some time flagging up the fact that work was in progress, HMRC unveiled their new guidance at para 47800 et seq of the Business Income Manual, and there has since been a lively debate about it on AccountingWeb here.
The guidance has a welcome no-nonsense tone to it. It includes statements like 'enquiries are only likely to be worthwhile where the amount claimed is significant', and that for running costs such as light and heat 'if the claim is small and there is only minor business use of the home … you may accept a claim based on any reasonable basis'.
The justification for apportioning costs is in case law: Templeman J in Caillebotte v Quinn [1975] 50 TC 222 — a case known for what it said about costs of lunches, another area where guidance is currently very confusing — said that the costs of using a room for business purposes can be apportioned, allowing the proportion for when it is so used.
Although the guidance says that there is no single way to apportion costs, it does highlight three factors to take into account: area of the total property used for business, usage when there is a metered supply, and time apportionment based on business usage versus any other use.
Types of expenditure
The guidance also lists particular types of expenditure which can be apportioned and claimed. Of these, the ones which some might not have thought claimable are:
- Mortgage interest — there has been some dispute in the past as to whether this was allowable when there was no exclusive business use of an area;
- Telecommunications — contrary to earlier practice, HMRC will now allow a proportion of line rental in addition to the cost of business calls on a single mixed-use line. Use can sometimes take incoming calls into account, although normally an apportionment of outgoing calls will be enough. The same approach is used for broadband costs, and 'a flexible approach' is to be used for apportioning all-inclusive plans;
- Insurance — the appropriate part of a household policy can be claimed, even though it is a single indivisible expense, when there is no separate business policy; and
- Repairs and maintenance — a proportion of general expenses can be claimed based on the proportion used for other expenses. This seems to apply particularly to external repairs and redecoration.
Examples
One of the most commented on aspects of the new guidance is that it includes several examples. Examples can be a two-edged sword; the danger is that they will be used by advisers and Inspectors alike as the only way to apportion expenditure in similar situations. In fact the guidance goes out of its way to say that these are only a guide and are not intended to be prescriptive.
What they do is to show the thought processes that both advisers and Inspectors might go through in considering certain problems and situations. Rather than go through each example, I want to highlight some of the principles that I think can be drawn from them, and reference the relevant examples. The examples can be found in the Business Information Manual 47825.
The first is that £2 a week is a claim that most people should be able to make provided they can show they have an area set aside for doing their business paperwork.
Both Example 1 and Example 3 concern claims of this amount for people who do no more than write up their business records once a week. The figure of £2 is presumably based on the de minimis claim for employees who work from home, and it is clear that figures much greater than this would need to be more fully justified — Example 3 concerns a potential claim for £450 a year, and the implication is that this would have been looked into.
The only other caveat is that both examples refer to having a room used solely for business purposes for at least a short time in the week. The implication, perhaps, is that if you write up your records in front of the TV when the rest of the family are there, there is no extra expenditure. So the moral of the story is to keep your business paperwork in a little-used room and to sit in there on your own to do it.
Non-exclusive use
Another key principle, which is not explicit but does seem to follow from the comment of Templeman J above, and is particularly set out in Example 4, is that when a room is not used solely for business purposes, then the proportion of costs that can be claimed is found by dividing time that the room is used for business divided by the total time period.
The facts of Example 4 are that an author works four hours each morning in her living room, which is then also used by the family for four hours in the evening (the implication appears to be that it is not used at all in the afternoon).
The room is 10% of the house, so the first step is to take that percentage of the total costs. In apportioning for time, it might optimistically be thought that you compare time spent on business to time spent for other purposes. On this basis the room is used equally for business and leisure, and the costs could be apportioned 50:50.
However, the example takes the view that you apportion based on four hours business use out of each 24 hour period, and that one sixth of the costs of the room can be claimed.
This seems to highlight one of the key issues to be considered in deciding whether or not to set aside a room solely for business purposes. If it had not been a living room in the example, but had instead been a study set aside solely for business, then the apportionment would have stopped at the 10% calculation — but of course the taxpayer would have opened herself up to a CGT bill on the appropriate proportion of the gain on the house when it was sold.
That is the comparison which advisers might have to do to arrive at the right answer before telling clients whether it is better to set aside the room exclusively or to make sure that there is some non-business use.
There are also other factors to take into account. For example, a room which is used mostly as an office to run a business, but also for private web-surfing and email for an hour or two in the evening, will clearly avoid the CGT problem.
Nevertheless, depending on the amount of equipment and paperwork involved in the business, it might be argued that during the period when the room has no-one in it, it is still predominantly being used for business purposes, since it is full of business equipment. It could certainly also be argued that the apportionment of heating other than central heating, and also of lighting, should be made on an actual usage basis, or perhaps that heating should be apportioned over a 16 hour day if it is turned off at night.
All of these would seem to fall within the scope of allowing any reasonable apportionment.
Fitting the facts
However, the apportionment needs to fit the facts. One of the disputes over on AccountingWeb is about Example 3. This concerns a businessman, Bert, who uses his spare bedroom as an office where he writes up the records once a week.
Other than that, it appears that the spare bedroom is only used for a guest during two weeks of the year (the example is not completely clear on what non-business use is made of the room, at least not to me). Bert starts by saying that the bedroom is 10% of the house and looks at 1/10th of the costs, which happen to be £450.
The example goes on: 'Bert recognises that this is far too much for what he actually does at home.
'Bert 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.'
The comments on AccountingWeb ask why the claim should be restricted. I think part of the answer is to do with the issue I have raised above on Example 4 — arguably, he should be taking the time he is actually in the office, say two hours a week, and dividing it by the total number of hours in the week.
But part of it is to do with the comment earlier in the guidance that the method used has to fit the facts of the case. The relevant paragraph in BIM 47815 concludes 'If two different methods produce substantially different figures, then that is likely to be a sign that one may more closely reflect the underlying facts and that the other method is flawed'.
By any reckoning, a deduction of nearly £9 a week just for a couple of hours business use of the spare room simply does not fit the facts. We continually complain that HMRC does not understand what real small business life is like; we cannot therefore turn round and use a mechanical apportionment when it does not give a real-life answer. Of course, we should also be prepared to challenge Inspectors who do the same.
More, please …
This seems to me to be a generally very helpful piece of guidance. It deals with a real issue that every small tax adviser has to make decisions on for his or her clients, it sets out some common-sense principles which show a good grasp of real small business life, and it includes examples showing how those principles can be applied in typical situations.
Excellent.
So can I now, as I indicated earlier, direct HMRC's attention to the question of when (and why) self-employed people may or may not deduct the expense of a lunch purchased while away from the office, with particular reference to the corresponding allowance made to civil servants who are out of the office for more than five hours …?
And a brief PS to those who heard me mention this article on the Jeremy Vine Show on Radio 2 last Friday: strictly speaking HMRC say there are different rules for employees working from home, see here.
But I don't see why, because it is all about 'wholly and exclusively'. We will try and get answers to this and return to it in a future article.
