The Tax Agency has always restricted the allowable expenses that the self-employed could deduct when working from home. This does not happen if you have an office.
Criteria of the Tax Agency and the Tax General Directorate
As previously reported, the criteria of the Tax Agency have always been very restrictive, and taxpayers who work from home could only deduct the expenses directly related to the ownership of the property, such as depreciation, council tax, etc. in the proportion of business use of their home. For example, if the housing of the taxpayer has 100 m2, and 20 meters are for business use, 20% of these costs may be deducted.
However, the tax agency did not allow these taxpayers claim as allowable expenses any of the utility bills in the housing. Thus, expenses such as electricity, water, heating were not allowable expenses. The reason is that those expenses were not exclusively related to the business.
The High Court of Justice of Madrid, quite rightly, ruled that it made no sense to allow partial deduction of the expenses related to the ownership of the property and not those allowing its use.
Thus, the Madrid Court decided to allow taxpayers deduct utility bills in the proportion of business use of the housing.
What if the self-employed is renting the housing?
In such cases, the taxpayer may not deduct expenses which are in connection with the ownership of the property, save as they pay such expenses as per lease agreement. In any case, such deduction may only apply proportionally, on the m2 of property allocated to the business. In addition, the taxpayer needs to inform the Tax Agency of the number of square meters for business use.
Regarding utility bills, it does not matter whether the taxpayer is the owner of the property of is on a lease agreement.
Finally, the lease agreement must include separately the portion of rent for housing, and that used for business. This mainly owed to the fact that the lease is VAT- exempt, whereas the office rent is not. However, the taxpayer may encounter difficulties when asking the landlord to collect two different rents (with and without VAT, on account of office use & personal use respectively) and to state such event in the lease agreement.
So how to fill in 2017 tax returns?
The criteria above are applicable for the tax return of 2017, and based on them taxpayers who work from home will have to decide what expenses to deduct in this year´s return. The debate arises only with respect to utility bills, as the expenses in connection with the property ownership are clear.
Good news utility bills will be allowable expenses in the return. The criteria of the Central Economic-Administrative Court binds the tax administration, and therefore the tax agency may no longer categorically reject the deduction of such expenses. But in what proportion? Taxpayers must make a decision:
They may adhere to the criteria of the Madrid High Court of Justice and deduct expenses for utility bills in the proportion of the business use of the property. However, this criteria may eventually bring problems with the tax agency.
The may adhere to the criteria of the Central Economic-Administrative Court, and apply the criteria of the square meters and hours where the property is for business use in order to establish the proportion of allowable utility bills. In this case, the possibility of getting into trouble with the Tax Agency is reduced, although the deduction will also be lower.
Tax return in 2018
Finally, good note of the administrative and judicial controversies has been taken and as of January 1, 2018 it has been made more clear the percentage of utility bills that the self-employed may deduct if they work from home.
Law 6/2017 on Urgent Reforms of the Self-Employed introduced a change in the law on personal income tax, whereby ´utility bills, such as water gas, electricity, telephone and internet are allowable expenses in the percentage of 30% with regards to the m2 of business use of the property unless a higher or lower percentage is evidenced´.
This criterion may not apply in the 2017 tax return. But at least in the following tax years taxpayers will have a clearer idea of what percentage may utility bills be deducted.