Business Expenses and the Home Office
When you're working hard all year to keep your business going and try to make it successful, it often seems unfair that you should have to pay so much business tax. But in actual fact, many young businesses pay too much tax because they don't realise how much they can get for free. This is especially true of businesses based within the family home, where legitimate expenses can overlap with household expenses.
If your family business has a home office, it's worth taking the time to understand how business expenses work. If you balance them out effectively, you may not make any tax chargeable profits in your first year of business at all!
Household Expenses And The Family BusinessNo matter what type of business you're running, for the purpose of calculating expenses you can treat it as an independent person. This means that if you, your wife and your three children share your home with your business office, the business is considered to be using one sixth of the household electricity (and, if it's used for heating, gas or oil).
If it shares a telephone line with the family, it's responsible for one sixth of that bill. It may also be responsible for all or part of your internet access costs. You can charge these expenses to your business and write them off against tax, which means that they are taken away from your profits before tax is calculated. You'll make less profit but in real terms, as a family, you'll be better off.
If your home office is based in a separate room which isn't used, or is hardly used, for domestic purposes, that room is liable to be charged business rate council tax, which your business will then be liable for. If your business is asked to pay tax like this, the rest of your home should then be rebanded for council tax as if that room were not a part of it, which normally means that you will be charged a lower domestic rate.
Office SuppliesAll of the equipment in your home office can be treated as a business expense, so keep your receipts. Some minor domestic use of business assets - such as playing games on your computer - is allowed, but they must be seen to be mainly for business use. Day to day supplies such as stationary are less carefully monitored and an estimated cost is generally accepted for tax purposes. You certainly won't be asked to account for where every biro has ended up, so it's okay if materials like these find their way into the rest of the house.
Travel ExpensesIt is not possible to claim travel expenses for day to day travel to and from your place of work, so having a home office will not normally disadvantage you like this, but if you are taking business trips then you should keep a careful note of your costs as you can treat this as a business expense.
To qualify, a trip must be mostly or primarily for the purposes of business, so you can't treat family holidays this way, but if you take a weekend away with your spouse, who also works for the business, and you can find a business event to attend in the place you've visiting (and keep the details of it), you can effectively get a free trip. If you are audited you will need to prove that you both needed to be there, so you should make sure you can demonstrate that you both had to attend the event or that one of you was acting as an assistant to the other.
Record KeepingThe most important thing you need to do in order to be able to claim business expenses is to keep good records. These can be divided into two files - receipts showing what you've actually paid for, and supplementary papers showing what you were doing in each instance. You won't need to submit the latter with your tax returns - they're just there in case auditors ask for them. Organise your receipts by date and start a new file for each financial year. You should keep these in your home office, ideally in a fireproof safe.
Good organisation and planning can save you a lot of money, both for your business itself and for your family. When business and family needs are planned out together, both can benefit.