The tax and insurance implications of homeworking

There's nothing like a heatwave for focusing the mind on the benefits of working from home. Out with the slow suffocating slog of commuting (time and money saved); in with flexible hours, reduced stress levels and, provided discipline is maintained, improved work output!

The convergence of computing and telecommunications combined with wireless technologies (wi-fi) is increasingly allowing work to be carried out at any time or location. You don't have to make a perspiring trudge into the office unless you feel an overwhelming need for its air-conditioning (assuming it has air-conditioning).

Homeworking is not without costs, though some of the expenditure is obvious (the purchase of an electric fan), but other costs may be hidden or just not thought through. Even so this way of working is a growing trend; the British Council for Offices records a 25% reduction in office space requirement across most industries and the Office of National Statistics says more than 2.1 million people specifically work from home.

In fact, around eight million spend some of their working week at home instead of the office, whether they are self-employed (nearly 1 in 12 British workers are now their own boss) or teleworking for their employer. It's a safe bet that a good proportion don't understand or appreciate the financial implications.

There are the obvious costs, of course. A dedicated workplace is required, hence the recent trend in office development of garden sheds, and a broadband internet connection is probably essential. There are enough telecoms deals on the market to choose from, including the bundled variants. But note that convenience can have its own hidden costs; compare deals carefully and decide what is really needed, for instance: cheap phone calls or a fast, inexpensive broadband facility.

The insurance you will need and the insurance you may need

Home and contents insurance cover should be reappraised. Premiums might not be raised because the presence of expensive, eminently thievable equipment is countered by the increased security of someone being at home all day. Policies should be checked for clauses such as the amount of cash money that can be kept at home and whether cover extends to items of equipment eg laptops and the like, being taken on business trips.

It is compulsory by law to have employers' liability insurance (obviously not applicable if a sole trader) and third party motor vehicle insurance. Optional but worth considering, depending on the nature and circumstances of the business, are public liability cover and professional indemnity insurance.

The first is relevant because of the legal liability to pay damages to members of the public for death, bodily injury or property damage occurring as the consequence of a business activity. Professional indemnity protects against financial liabilities to third parties arising from acts or omissions or deemed negligence in the course of operating a business. Income protection insurance should be considered, to ensure there's a replacement income if illness or disability prevent work.

As always check the terms and definitions of a policy, whether such conditions as back trouble or stress are excluded, and the period of deferment. On the property front, when does a home become a commercial premise as far as mortgage lenders are concerned? Many lenders don't have a hard and fast rule, or specific percentage cut-off point in terms of home area devoted to business use. However, a direct mailing operation, say, occupying two floors of a three storey house would doubtless be categorised as commercial and be subject to a higher rate mortgage, in contrast to a lone journalist scribbling away in the east wing garret of his otherwise domestically-used two-acre mansion.

Expenses can be a tricky area for those homeworking. Those on PAYE can be advised by their company as to what may be claimed, also the remuneration to be expected for turning the home into an extension of head office. For the self-employed good accountancy and immaculate financial record keeping are de rigueur.

HM Revenue & Customs needs to be satisfied that expense claims, tax concessions, capital allowances on equipment etc, are justifiable. It is wise to keep a log of miles driven and phone calls made that are attributable to business.

Note the taxman's questioning approach to self-employed or freelance claims when all work undertaken is for just one employer or company. Remember, too, that the natural tendency to make income appear as small as possible in the face of tax demands can have drawbacks. Income protection payments, for instance, are based on net relevant earnings, so the use of clever allowances and expenses to reduce taxable earnings could misfire. Also the combination of self-employed status and low income is not particularly helpful when trying to borrow large sums of money.

The taxman calls twice a year for the self employed which can cause difficulties if business income alternates between feast and famine and cash flow is not rigorously monitored. Declaring a home as a business premise could lead to a re-rating of council tax and claiming tax relief on mortgage payments renders liability to capital gains tax if and when the property is sold.

07 July 2006 © Moneyextra.com

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