The pandemic has accelerated the number of people working from home and many have now adopted that as their preferred way of working. There are also a large number of people running small businesses from home.
In a private property, there are a number of steps anyone running a business from home must take, such as informing mortgage lenders and home insurance providers. However, for anyone in a rented property – and for landlords - the situation is more complex.
In this article, we look at the requirements for working from home or running a business from home from both perspectives – tenant and landlord. We also set out the expenses anyone working or running a business from home can claim against their income tax assessment.
In this situation, a tenant is not running their own business; they are simply using their home as a full-time or part-time office. The general guidance here is that the property should be used primarily as a residence; any work-related use should not occupy more than 40 percent of the rented space.
If you are a tenant working from home, you should certainly notify your landlord as a courtesy. However, there may also be financial implications for your tenancy agreement. If you work from home full time, your costs for heating, lighting and broadband use are likely to increase. If you pay those bills directly to the supplier, there is no complication. But, if your landlord includes those costs in the rental figure, you may have to renegotiate the rent.
Although some of the points about working from home apply, there are further legal and financial issues to consider.
As a tenant, you must notify your landlord and ask permission to run your business from home. Before legislation changed in 2015, this might have proved difficult as landlords were generally advised to refuse requests to establish home businesses. However, the Small Business and Employment Act 2015 (the Act) recognised the changing work environment and simplified the situation.
If a business meets the Act’s criteria as ‘a business of a kind that might reasonably be carried on at home’, then the landlord can agree to your renegotiate request. Although the Act doesn’t specify the types of business that meet the criteria, these might include secretarial services, freelance writing or translation, accountancy or financial advisory services – generally service-related businesses. Self-employed plumbers, builders, hairdressers and beauticians, window cleaners and other trades might use rented properties as their office for doing estimates or accounts.
There are certain characteristics that might lead a landlord to reasonably refuse your request. The business should not alter the appearance of the property or involve large numbers of people visiting. And, it should not be noisy or cause disruption to the neighbours. That would probably rule out catering businesses that serve customers on the premises, any business using heavy machinery or providing noisy repair services on the premises.
If the landlord gives permission to run the business from home, you may have to renegotiate utility and other costs if they are included in your rent, and the landlord may have to change the tenancy agreement. You must also take out business insurance and you should also ask your local council if you are liable for business rates as well as council tax.
It’s important to remember that the landlord’s permission only applies to one type of business – the one that you requested. If you change the original business or set up an additional business, the agreement would become invalid.
If you are satisfied that your tenant’s proposed business meets the criteria set out in the Act and the other general considerations of noise and appearance, you should confirm your agreement to the request in writing and set out your requirements for the business.
Ask your tenant to confirm that they are only running the business they described in their request, that they have appropriate business insurance and that they will take measures to prevent any damage to the property caused by the business.
If the tenancy agreement includes a clause on frequency of access to inspect the property, you may wish to change the frequency.
Before making your decision, you should take a number of factors into consideration. Does your mortgage on the rented property specify residential-only use? If it does, you may be in breach of the mortgage agreement and you would either have to refuse the request or discuss the matter with your lender. You should also check with your local council if the change of use meets their zoning requirements. Certain types of ‘heavier’ businesses may contravene the zoning laws. If the business involves customers or suppliers visiting the property, would you be liable for negligence if a visitor had an accident?
To help make your decision, you should ask your tenant to provide full details of the business, including:
Nature of the business
Proportion of rented space required for the business
Additional requirements for water, electricity, broadband and other services
Details of business insurance
Equipment and inventory used in the business
Inventory storage requirements
Normal business hours
Number of customers visiting the property and parking arrangements for customers
Nature and frequency of deliveries to the business
Once you have made your decision, you should issue a new tenancy agreement updating the original document or issue an additional agreement to cover business use of the property.
As the situation can be complicated, it may be useful to ask a solicitor to draw up or review the agreement, to ensure that it covers any risks or liabilities and protects the interests of both parties.
If you are using your home for work or running a business, you will likely incur additional costs and you can claim these as allowable expenses against your income tax liability.
HMRC states that any expenses claimed must be ‘wholly, necessarily and exclusively’ for the purposes of business. However, it may be that certain expenses have both a private and business purpose – a bill for heating and lighting, for example. In that case you have to apportion the costs between private and business use.
The list of allowable home-related expenses generally includes the following items:
Rent or mortgage interest
Utility costs for lighting, heating and power
Telephone line rental, call charges, mobile phone costs and broadband charges
Home and business insurance
Property repairs relating to rooms used for business
Cleaning and decorating rooms used for business
Revenue expenditure in connection with converting part of home into office
Capital allowances for business equipment or furniture
Business equipment repairs
You should retain invoices and receipts for any expenses you are claiming, together with an explanation of any items that are apportioned between business and private use. For example, if you use one room out of five wholly for work or business, you could claim twenty percent of the room-related expenses.
There is also a simpler way of claiming if you only use your home for part-time work or business. If you work from home at least 25 hours a month, you can use HMRC’s ‘simplified expenses’, which is a flat monthly rate calculated by the government.
Hours worked at home per month
Flat rate per month
25 to 50
51 to 100
101 and more
However, that flat rate does not include telephone or broadband expenses. You can claim the business proportion of these bills by working out the actual costs.
Before opting for simplified expenses, you should compare the flat rate with your actual allowable costs using this government calculator.
This is a brief outline of the guidelines covering working from home or running a business in a rented property as it applies to tenants and landlords. If you would like professional advice on any aspect of these guidelines, our team of experienced small business accountants and solicitors will be glad to help.