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After starting my first business back in 1988, I did everything wrong as the internet did not exist so I could not Google for information like this. I relied on an accountancy firm who had little idea of what it was like to run a business as they were an administrative service provider who were basically a BPO or "Business Process Outsource" operation for things that were too complex to be done "in-house". I had no idea about carrying forward losses, about the introduction of assets to a business, claimable expenses and financial planning. In hindsight I should have read some books and that would have enlightened me. But instead I had to learn the hard way and fold in year three or 1991. After meeting John Gomersall in 1993, things became more clear thanks his book "Basic Financial Knowhow for Small Businesses". John's book was an eye opener, its out of print now but I have a copy published in 1990 with no ISBN reference. If you want one I can help you. Then it was help from Richard Sparrow in 1994 a very skilled person with business strategy. What is your biggest fixed overhead apart from wages. Business premises rent maybe? Can you operate your business as a limited company and work from home to save on this overhead? Why not rent out a room to your business like you would a bedroom to a lodger? Then you can offset the rental against your business profits and reduce your overall tax bill. Remember a business is a separate entity to you personally so think of it as two people undertaking a business transaction. Nine things you need to understand to put this arrangement in place in the correct fashion. 1. Make up a new rental agreement. You would need to formulate a rental agreement between you the property owner and the limited company that you work for as an employee. 2. Calculate a fair market rate rental per annum. The rent charged should be equal to the amount that the space in the property that you use based on how much the actual property costs you. That means that any income received is equal to the costs and there is no personal profit from the rent you charge. 3. Understand your own tax position with rental income received The rent you'll be getting from the company won't attract income tax or national insurance as the costs of your space used for business will be shown on your self assessment tax return. 4. Analyse your own situation and work out what your premises cost you per year An example to show how this works. Sagaren runs his business from a studio in his garden which is also a garage and tool shed. He works from this building. The garden room is used exclusively for business during the week but serves as storage at the weekends. His house has a total of 6 rooms, all of equal size. Sagaren has added up his mortgage interest, council tax, utilities, repairs, maintenance, insurance and broadband costs and they amount to £36,000 per calendar year. 5. Ensure that you calculate a fair rental rate in the correct way Ensure that you calculate a fair rental rate in the correct way and declare the gain via your Self Assessment tax return. You calculate the rental charge as follows: Cost per room = £36,000 divided by 6 rooms = £6,000. He uses the office for 6 out of 7 days each week, so he charges 6/7ths of the room cost to the business. The rental charge is £5,143 per year. Sagaren is paid this rental from the business. The business records this as a cost in the company accounts purchase ledger as a fixed overhead, which reduces the tax payable on profits. Sagaren enters the figures into his self assessment tax return but has no further tax to pay on the amount received. 6. Rental property rather than a mortgaged property The rent charged will be based upon your own circumstances. For example if you rent your property you can use the rent paid instead of the mortgage interest in the calculation. So you will need to analyse the costs in a way similar to the mortgage scenario in 5. Have a go with an XL spreadsheet, then check with your accountant or another experienced small business or "micro enterprise" owner to see if they agree with your workings. They should be able to advise you with this and acceptable arrangements with the Revenue & Customs office and ensure the rental agreement is correct if your company is claiming this expense as non-taxable fixed overhead deduction for your business. 7. The nitty gritty of council rules To understand whether or not part of your property could be liable to business rates, you have to consider the extent and frequency of the non-personal (business) use of the room or multiple rooms and any specific changes made to you property to accommodate the business use. It's possible that local council business rates may apply to your property even if you work at home and don't actually require a room to conduct your business. Check the rules in your local area. 8. Business Rates If you use your own or a rented residential property and work at home you should check your local council websites for any rules which will give information about business rates. In most cases the local authorities do not apply any bushiness rates, if you are operating or trading with a ‘home office’ set-up. 9. Does this affect Capital Gains tax? There is misconception that this arrangement will attract Capital Gains tax. This is not the case as long as the room is not solely used for the business i.e. an office in the bedroom 365 days a year. |
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