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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Simplified expenses: private use of business premises

S94I ITTOIA 2005

Where business premises are used partly for private purposes as a home, the simplified expenses rules mean that businesses can choose to make a private use adjustment based on a flat rate amount for the 2013-14 tax year onwards. This amount is subtracted from actual expenses incurred to arrive at the amount deductible as a business expense.

Use of the flat rate adjustment is optional for all sole traders and business partnerships (excluding those with a corporate partner), whether they have also elected to use the cash basis or not.

The flat rate private use adjustment is only available if the premises are used mainly for the purposes of carrying on the trade (for example, bed and breakfast establishments, guesthouses and small nursing homes).

The flat rate amount reflects the non-business proportion of expenditure on household goods and services, rent, utilities, food and non-alcoholic drinks.

Mortgage interest, business rates, council tax and domestic rates in Northern Ireland are excluded from the flat rate, but the trade proportion of these premises costs is an allowable deduction in calculating the trading income of the period (see BIM37600 and BIM46840).

The flat rates are as follows:

Number of people Flat rate per month
   
1 £350
2 £500
3 or more £650

The non-business use amount for a period is the sum of the flat rates for each month, or part of a month, falling within that period, and depends on the number of occupants using the premises otherwise than in the course of the trade in each month (including non-paying guests and children).

Example

Sue runs a bed and breakfast and lives at the premises throughout the year with her son Stewart. Total expenditure on food, utilities, household goods, etc, is £15,000 in the year to 30 August 2014. In calculating trading income for the year, the allowable proportion of this expenditure is:

  £ £
     
Total expenses   15,000
Less 500 x 12 months (6,000)
Flat rate for private use    
Allowable expenses   9,000

Stewart leaves for university in September 2014 and returns to live at the bed and breakfast for 3 months in the summer. The expenditure in the year to 30 August 2015 is £13,000. Sue can work out the allowable proportion as follows:

  £ £ £
       
Total expenses     13,000
Less      
Flat rate for private use 350 x 9 months 3,150  
  500 x 3 months 1,500 (4,650)
Allowable expenses     8,350

If Sue chooses not to use simplified expenses for private use of business premises she should keep sufficient records to allow her to identify the trade proportion of the expenses which are included in the flat rate.

Transitional arrangements 2013-14

Prior to the introduction of the simplified expenses rules, a number of local agreements existed between HMRC officials and representatives of owners of guesthouses and hotels in order to minimise the administrative costs of establishing an appropriate level of non-business expenditure. All local ‘board and lodging’ agreements have now been withdrawn and no business can use them for the first time for the 2013-14 tax year.

However, businesses using an existing agreement with HMRC in 2012-13 can use that agreement for the 2013-14 tax year only, as an alternative to either the simplified expenses method or apportionment on the normal statutory basis.