Home office claims – watch out!

Clearly IR must have too much time on its hands if you’ve had a chance to read the latest issue of ‘Agents Answers’. The article in question discusses home office claims and suggests that if a company uses a home office, that is, the home of one of its shareholders, it will not be able to claim a deduction for the office unless it has incurred the actual cost.

In this regard, IR’s view is that a company can only claim a deduction where the following conditions are satisfied:

  • The company can prove a nexus between its business income and the home office expense that the company is claiming. Any private portion cannot be claimed.
  • The company has incurred the expenditure within the income year the deduction is being claimed. That is, it has a liability to pay the expense either direct to the provider or to the homeowner.
  • Appropriate accounting records must be kept showing that these conditions have been satisfied, along with any agreement allowing the company to use the home.

The commentary then goes on to discuss that payments to shareholders can only be exempt income to the shareholder (applying section CW 17) where an employment relationship exists i.e., the person is considered a shareholder employee. Since it’s a Monday and I’m feeling kind, here’s the Act’s definition so you don’t need to go looking for yourself:

Shareholder-employee means a person who receives or is entitled to receive—

(a) salary or wages to which section RD 3B or RD 3C (which relate to income other than PAYE) applies:

(b) income, other than from a PAYE income payment, to which section RD 3B or RD 3C applies,

Now I must admit that I am certainly not going to be losing a lot of sleep over the article, materiality being the primary reason for that, but because they’re made the effort to say something, you might just want to mention to any non-shareholder-employee client of yours with a home office, that the numbers they give you annually do have some sort of correlation to actual expenses incurred by them, just in case the Revenue comes knocking on their home office door.