Today we have another fantastically helpful post from Ruth addressing a question that is pertinent to all home workers whether you’re an indpendent baker or not. I’m going to work my way through the ‘difficult answer’ and I’ll let you all know how much of a difference it makes to my tax bill Over to Ruth:
Hello again! BEWARE – This could be the most complicated blog post you’ll ever read!
This post is based on a forum question How much can I claim for Use of Home? There is an easy answer to this of course…and a more difficult one (well it IS to do with tax!). Which answer you need depends on how much you use your home, for most bakers you’re going to spend more than £3 per week by the time you’ve factored in electricity/gas for the use of the oven, hot water for washing up, heating etc., electricity for the running of the fridge, etc etc etc!
HMRC (that’s the tax man to you and me) will allow you to claim £3 per week for your use of home. They will allow this without any questions, you will never have to explain how you came up with this figure, it’s just fine by them. So, that £3 per week that you have been self-employed, £156 per whole tax year.
Difficult Answer (examples in bold)
The more difficult answer is obviously not as straight-forward. If you want to claim more than £3 per week, you can, but it must be backed up by how you got to the figure in case HMRC want to know. I’ll try and explain it easily.
- You need to count the numbers of rooms in your house, excluding hallways and landings (unless the landing or hallway also doubles up as an office for example). 6
- You then need to count how many rooms are used for the business, so for example it could be one – just the kitchen, or it could be three – the kitchen for cooking, the dining room table for modelling/piping buttercream etc and the living room, where the computer lives in the corner. 1
- You then need to work out, on average, how many hours a week those rooms are used for business (c1) 34 and how many hours a week they are used in total including business hours (c2) 42 (by the whole household not just be you).
- You then need to get together all your bills for the household including gas, electric, oil, water, cleaning (if you are lucky to have a cleaner – I’m not *sob*), rent, mortgage (interest amount only), council tax, insurance. I’ll come to telephone and broadband a little later.
So, I bet you’re thinking – ok, that bit’s not so bad – well, unfortunately this is where it starts to get a little more complicated :0
Now you have to decide which of your bills are Variable and which of them are Fixed, here’s a little table to help
|Electric, Gas, Oil, Water||Variable|
Now, you’ve done that – you can actually start to do some calculations – woohoo! So, first calculate your Fixed Cost multiplier (e) by taking the amount of business hours a week (c1) and dividing by the total number of hours in a week (24 hours per day x 7 days per week).
So if you use the rooms for business for a total of 34 hours per week, your Fixed Cost multiplier would be 34 ÷ (24*7) = 0.2024.
Next, calculate your Variable Cost multiplier (f) by taking the number of business hours a week (c1) and dividing by the total number of hours used per week (c2). 34/42=0.8095
Ok, so now you know
(a) Number of rooms in house 6
(b) Number of rooms used for business 1
(c1) Business Hours per week 34
(c2) Total Hours per week 42
(d) Cost of bills split into Variable and Fixed Variable £1750 Fixed £4675
(e) Fixed Cost multiplier 0.2024
(f) Variable Cost multiplier 0.8095
The next step is to work out your bills in yearly terms (or however long you’ve been trading for if less than a year). To do this you simply take a weekly bill and times it by 52 or take a four-weekly bill and times it by 13 or take a monthly bill and times it by 12 or take a quarterly bill and times it by 4 *phew*. Now add all your Variable bills (g) together and all your Fixed bills together (h). So now you should have all the above information (a) to (f) and also your Variable Annual bills (g) and your Fixed Annual bills (h).
Now we can actually calculate the Use of Home figure – at last I hear you cry!
Take your Variable Annual bills (g) and divide it by the number of rooms in the house (a)
£1750/6 = 291.67 then multiply it by the number of rooms used for business 1
= 291.67 x 1 = 291.67 (i)
Then you take this figure (i) and times it by your Variable Cost multiplier (f), this is the figure for Use of Home for Variable bills.
291.67 x 0.8095 = £236.11
Take your Fixed Annual bills (h) and divide it by the number of rooms in the house (a)
£4675/6 = 779.17 then multiply it by the number of rooms used for business 1
= 779.17 x 1 = 779.17 (j)
Then you take this figure (j) and times it by your Fixed Cost multiplier (e), this is the figure for Use of Home for Variable bills.
779.17 x 0.2024 = £157.70
Telephone and Broadband costs
Telephone and broadband costs are dealt with in another way, you simply estimate the percentage of use used for business and then multiply the annual bills by that percentage.
75% of my broadband is business use, the annual cost is £235 so my Use of Home amount for business is 235 x 0.75 = £176.25
Now you add all the use of home figures up to calculate the total that can be put through your accounts, it is classed as Capital that you have invested into the business. If your bills are not in your name but in your partners/parents name then you must still calculate as above but treat the figure as if it is an invoice from a supplier. This can then be put through your accounts as if you have paid off the invoice using your personal money and is then treated in the same way, Capital that you have invested into the business.
An Excel spreadsheet is available free from me by email request that allows you to enter the information and the calculations are performed for you. If this is too confusing or you don’t have the time, energy or enthusiasm (can’t blame you there) I also offer a Use of Home calculation service of a flat fee of £10, this can than of course be put through your accounts as a business expense and go against any tax you may have to pay.
After writing this post I definitely need some cake and a cuppa!!