How to calculate use of home as office for e-commerce entrepreneurs

If you are one of the many e-commerce entrepreneurs that created your business at home and have continued to work from home, you need to be aware of the use of home as office allowance, that can be used to offset your taxes.

It is commonplace for an e-commerce business to begin at home, and it may stay this way throughout its life. Every hour you are working from home, you are accruing costs that will be included in your household bills but use of home as office ensures your e-commerce business lists these costs as an expense.

What does use of home as office include?

Use of home as office can include a wide variety of expenses, including:

• Council tax
• Rent
• Mortgage interest (although principal costs are not allowable)
• Electricity, oil, and gas
• Water (if metered)
• Telephone and internet
• Cleaning
• House repairs
• Home insurance
• Business equipment repairs
• Revenue expenditure in connection with converting part of your home into an office
• Capital allowances for tools connecting to the conversion of part of your home into an office
• Capital allowances for business equipment and business fixtures and fittings

How to calculate use of home as office

Use of home as office can be used by limited companies as a director’s expense, but as an e-commerce entrepreneur, you are likely a sole trader or a partner. You have two methods to calculate use of home as office at your disposal:

1. Simplified expenses
2. Calculating the business proportion of expenses

You can use HMRC’s comparison tool if you are uncertain about which method you should use.

Simplified expenses method

The simplified expenses method is a quick and easy way to calculate your use of home as office cost but may not always result in the maximum amount being claimed. HMRC uses the number of hours worked per month in the home to calculate your allowance.

You must work a minimum of 25 hours a month from home to qualify for the base level. The simplified expenses amount does not include phone and internet charges. These may be reclaimable on top of your use of home as office, but it is best to confirm with your e-commerce accountant if you should do this.

Each month should be looked at separately. If, for example, you normally work from home 25-50 hours a month but during COVID, worked 51-100 for 3 months of the year, you should claim:

£10 x 9 = £90
£18 x 3 = £54

Total for the year = £144

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Proportional expenses method

The proportional expenses method is more complicated and time-consuming but will result in you receiving a fair and more accurate amount if your expenses are high. If this is your chosen method, all calculations and bills must be stored for 6 years.

1. First, work out your average amount of work from home hours per week.
2. Divide this number by 168, the total number of hours per week. For example, if you work 5 hours a day, 5 days a week, then 25/168 = 14.88%
3. Count how many rooms you use for your e-commerce business, for example, a home office or storage rooms.
4. Divide this number by the total amount of rooms (not including corridors or hallways but including loft space if it is usable). For example, 2/8 for an average 3-bedroom home that also has an office and one bedroom used as e-commerce storage = 25%
5. Multiply your hours and your rooms to get a total proportion of business spending. Using our example figures:
   0.1488 * 0.25 = 0.0372 i.e. 3.72%
6. Use your percentage from step 5 against the annual bills for all allowable use of home as office expenses. The resulting amounts can be offset from your trading profits, reducing your tax bill.

Next Steps

If you need help calculating your use of home as office expenditure or would like assistance with any other e-commerce-related costs, our team are here to help. We know e-commerce accounting can be complicated and that’s why we specialise in it. Let us help you to make your e-commerce business thrive.