Everald Dewar | Dual-purpose deductions for work-from-home taxpayer
In continuation of the untamed and contentious issue surrounding employed versus self-employed persons, where it appears that the usual traditional term ‘employees’ have been reclassified at times – becoming independent contractors, contract workers, and ‘networking’ whether part-time or full-time – we look at a person who is truly self-employed and works from home.
In that case, expenditure related directly to the business are deductible, including travelling, and computers expenses. It behoves the employee to keep records of business income and expenditure. Incomplete records are dangerous.
In the case of someone working from home, dual-purpose expenditure may involve a proportion of say, telephone line rental, motor running expenses, content insurance, and use of one or more rooms in the house, either partly or solely for business.
Although statute law makes no provision for dual-purpose expenditure, nevertheless it is long-established practice to make a claim for a proportion of total expenditure incurred where there is an element of business purpose.
When working from home, one may be able to claim expenses for journeys incurred for business purposes that start from home, especially as a business wholly carried on at the residence, as opposed to a subcontractor merely doing his accounts and administration at home.
Whatever proportion of a particular expense is claimed for business purposes, it is essential to keep receipted accounts for a minimum period of six years. This includes mobile phone and landline bills, receipts for motor repairs, servicing and insurance, property tax, repairs and maintenance and other expenditure relating to the property as a whole. However, cutting the lawn, paying the helper and definitely, club fees, boat and other recreational expenses should not be included.
It is unrealistic to expect a taxpayer to log every telephone call and keep an exact record of business mileage, but what valid evidence there is of the amount claimed would be very useful. Logging telephone calls for a sample period, the same for business mileage, and evidence of journeys from a business diary could be helpful if a dispute arises about the amount claimed.
It will simply not be good to claim, say, 60 per cent business mileage without some evidence. In the case of an enquiry, a percentage claim is sometimes an open invitation for Tax Administration Jamaica agents to do their own percentage, and attempting to go back and adjust for at least three years with penalties and interest.
A similar problem is where domestic overheads rechargeable for business purposes appear in round sum and no evidence exists of actual occurrence.
The final issue to be considered is a spouse’s salary, where appropriate, or where one spouse has employment in their marital partner’s business. Where spouses have carried out valuable work, they should be paid, in which case pay-as-you-earn tax obligations will apply if regular payments are made. In the past, a useful tax-planning exercise was to utilise the tax-free threshold to make sure that this does not go to waste. Now, PAYE is essential, as the employer may receive an Employment Tax Credit.
In today’s world, both husband and wife might well have their own businesses. The other possibility is a husband and wife partnership.
There are situations where both are carrying on business on their own, but where one is making a loss and the other is profitable. In such a scenario, it may be advisable to combine both so as to utilise the tax credits generated by the loss. However, there are potential complications, and as to how these may be overcome is beyond the scope of this article.
In today’s world, the employment must be justified based on type of work done, responsibility and time spent, which does not include working while preparing meals for the family or attending an infant. It should be exclusively done.
Justification can include the time spent on secretarial work, preparation of accounts, visiting the bank, purchasing office items and entertaining business customers.
The somewhat laissez-faire attitude to small accounts for self-employed businesses that are ran from home must end. Taxpayers must understand that history cannot be subsequently rewritten to detail record-keeping; and accounts cannot come out of thin air.
Justification of expenditure is essential to preserve and validate self-employment status.
Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston.email@example.com