Legendary investor Warren Buffett started his first few investment partnerships in his 20’s and pretty much ran a multi-million dollar firm from home. Buffett, of course, still lives in that home today. His choice to forgo an office in his early years is because of a key skill that has also helped him build one of the largest companies on the planet – pragmatism.
Business owners need to be pragmatic. Working from home could be the best option for you when you’re just getting started. Not only is it a lot more convenient but it’s also a lot cheaper. But a cheap and convenient home office doesn’t come without its downsides. If you’ve planning to work from home as you set up your business empire, here’s what you need to know about taxes, rents, regulations, and permissions:
Perhaps the best reason to start a home-business is the convenience. A lot of business models simply do not need a fancy office or conference rooms. A professional consultancy firm needs a good internet connection and an online fashion retailer just needs a basement to store inventory. Starting a small business at home is such a good option that there’s nearly 2.9 million home-based small businesses in the UK that contribute over £300 billion to the British economy every year.
In fact, nearly two-thirds of new businesses started in the UK are started from home. From cakes to financial advice, some businesses are better executed from home. Especially considering the rental rate for commercial property. On average, commercial offices in the UK tend to cost between £4 to £10 per square foot. They can, of course, be as high as £35 psf in Manchester and £52.5 in London. Those rental expenses are avoided by working from home.
Another clear advantage is the flexibility. If you wanted to move to a formal office or wanted to sell your house quickly and move to a better city for better opportunities, there’s really nothing holding you back. A long-term lease on a commercial property or a license from a certain district would need to a lot more tedious to move.
But starting a business from home isn’t without downside. It becomes a lot more difficult to keep your work and home-life separate when you live and work in the same place all day. You might end up working much longer hours than expected and most home business owners feel a sense of isolation from their local community. Creating a network of home-based businesses could help you deal with these issues. Talk to entrepreneurs in your local community and try to interact with people who face the same issues as you.
Furthermore, using your home as a workplace might affect your mortgage, home insurance, and taxes.
Small home-based businesses need to take into account the local regulations. You may need to get permission to run such an operation. Your local planning office or the local council should be able to guide you on the protocol of starting a home business in the area. If you live in a rented apartment, your landlord will need to be informed. As per the Model Tenancy Agreement, your landlord needs to give you permission to start a business at home.
If the property is a leasehold, there could be restrictions on commercial activities in the lease agreement. Make sure you check for this.
Also, you home insurance will not cover the business. Visit the British Insurance Brokers’ Association (BIBA) website to find a suitable insurance broker who can hook you up with a valid business insurance. This will cover the inventory, stock, and computers that form part of the business. Also, customers visiting your premises will be covered under the business insurance.
Let’s not forget taxes. If you’re a sole trader or part of a partnership you have to include your business costs separately on your Self Assessment tax returns. This means a small part of the council taxes you pay on the house can be claimed as business expenses. Phone bills, broadband, lighting and heating for the office can also be claimed as expenses.
Your small business needs a structure for tax and regulatory purposes. Take the time to figure out if you’re going to set up as a self-employed individual, a limited company, or a partnership. You can also register a social enterprise if your business was set up to serve social or environmental purposes. Whichever structure you pick, have it registered at Companies House and HM Revenue & Customs.
If you earn more than £77,000 in revenue each year, you may also have to register for value added tax (VAT).
Eventually, when you sell the house you may have to pay Capital Gains taxes on the part that was being used as the office. Business rates apply to that part of the property, while the council will determine the taxes on the rest of the residential property. If you’re in Scotland, this will mean getting in touch with the local assessor. In the rest of the UK, the Valuation Office Agency (VOA) will sort this out for you.
To sum up, setting up a home business may be the best option for a lot of first-time entrepreneurs. It is the most pragmatic decision you could make to cut costs and improve flexibility. But this style of working will eventually encroach on your personal space and leave you feeling a bit isolated. Speak to entrepreneurs in your local community and try building a network of small businesses. This will help you get the support you need to balance work and personal matters better.
It will also have an impact on your taxes, insurance, and mortgage. Take the time to understand the complexities and register everything you need to before you start selling from home.