How to do your financial planning when you're running a business from home

Running a business from home requires careful financial planning. Taxes, costs and insurance all have to be taken into account. This article includes everything you need to know to start planning your finances when you're running a business from home.

David Wragg, Enterprise Nation adviser and managing partner of Leslie Dark & Co, shares advice on how to plan finances for a home-based business.

Find out more about how David can support your business and book a free taster session on his Enterprise Nation profile page.

Start with a budget for business and personal costs

First, you need to draw up a budget. You need to think about all the costs required to get your business off the ground and operational. These costs could include:

• buying or hiring a vehicle and the cost of fuel, insurance and maintenance

• equipment, including tools, computers and phones

• establishing and hosting a website

• advertising

• telephone and internet

You might already have a lot of the equipment you need, so some costly expenditure might not be necessary until your business is more established.

You'll also need to think about your own personal costs such as rent, mortgage payments, utility bills and so on. You can then work out how much of your own money you can afford to invest in your new business and whether you'll need to look for third-party investment or business loans.

It's also a good idea to produce a simple cash-flow statement, where you map out on a spreadsheet your anticipated income and expenses over the next 12 months. This helps you in highlighting months where cash may be tight, particularly if your business is seasonal.

Business plans are useful for setting your objectives, developing ideas for the short and medium term and helping you to raise finance.

If people outside your business are going to see your business plan, the document must look professional and be well-structured.

Understanding business rates and expenses

You do not usually have to pay business rates for home-based businesses if you:

• use a small part of your home for your business – for example, a bedroom

• sell goods by post

However, you may need to pay business rates as well as council tax if:

• your property is part business and part domestic – for example, if you live above your shop

• you sell goods or services to people who visit your property

• you employ other people to work at your property

• you have made changes to your home for your business

You'll need to keep receipts for any expenditure you've incurred in connection with your business activities. If you're not sure whether tax relief is available, it's still best to keep the receipts and give all documents to your accountant.

We recommend you record your business transactions using accounting software such as Sage, Xero or QuickBooks.

Tax allowable expenses include:

• staff costs – for example, salaries or subcontractor costs

• things you buy to sell on – for example, stock or raw materials

• financial costs – for example, insurance or bank charges

• advertising or marketing – for example, website costs

• training courses related to your business – for example, refresher courses

They do not include money taken from your business to pay for private purchases.

You can also claim tax relief – known as capital allowances – on equipment or motor vehicles. If you buy something for both personal and business use, you can only claim tax relief for the business costs.

For example, if your mobile phone bills for the year total £200 and you use your phone 70% for business and 30% privately, your claim for tax relief would be 70% of £200, which is £140. However, it's best to record the full cost of your mobile phone bills in your accounting records and let your accountant work out your claim for tax relief.

There are also special rules if you work from home. You may be able to claim a proportion of your costs for things like:

• heating

• electricity

• council tax

• mortgage interest or rent

• internet and telephone use

You'll need to use a reasonable method of dividing your costs – for example, by the number of rooms you use for business and the amount of time you spend working from home.

Alternatively, you could claim your tax relief using a "simplified method".

We would also urge against using a particular room in your house exclusively for business purposes as, by doing so, you could be charged non-domestic rates. If you ever sold your house, you might be liable for capital gains tax too.

What you need to tell HMRC

Every new UK business needs to register with HM Revenue & Customs (HMRC). If you register and set up a new company with Companies House, HMRC will be automatically informed.

However, if you are setting up as a sole trader or partner, you'll need to inform HMRC yourself.

You'll also need to consider whether you need to register your business for VAT purposes. This is compulsory if you expect your turnover to exceed £85,000 within the next 30 days (or if it has exceeded £85,000 within the past 12 months). You can also register for VAT purposes on a voluntary basis.

Your accountant can advise you on which VAT scheme may be appropriate for your particular business.

Planning restrictions for home-based businesses

If your home is going to remain pretty much as it is now, with your business "quietly accommodated within it", government guidance states that you shouldn't need planning permission.

However, you're likely to need planning permission if you'll no longer be using your home as a private residence, or if there's a marked rise in traffic, with customers coming to your house.

If your business causes environmental disturbance by creating lots of noise, cooking smells or unsightly rubbish, you would need to contact your local council's planning department to make sure you're not falling foul of any planning regulations.

You may also want to consider, out of courtesy, letting immediate neighbours know that you'll be running your business from home.

By running a business from home, you're automatically publicising where you live and this could be a concern. You may wish to 'muddy the waters' and limit the amount of business mail you receive by using a virtual office space, namely an alternative business address.

This is also useful if you ever move home, as it saves you the task of updating your address for business purposes.

Insurance when you're running a business from home

If you're running your own business, it's important to make sure you're insured.

You'll certainly need some kind of business insurance, such as:

• professional indemnity

• product liability

• public liability (if people are visiting you at home)

• employers' liability

• business equipment cover

You may also want to take out some cover for loss of earnings or sickness. It's important to remember that as a self-employed individual, you won't have the backup of any employer's sickness policy scheme. Because of that, a long-term sickness which affects your ability to work could have a devastating impact on your business.

It would also be prudent to think about health and safety, as insurers may be unlikely to honour a claim if you haven't taken reasonable steps to comply with the laws around this.

If customers are visiting your house, you would need to make sure that there are no hazards – such as uneven entrance steps – which could cause them harm. Further, if your home business involves cooking, you must contact your local council's environmental health department.

Relevant resources

• What insurance do I need when running a business from home?

• How to register as a sole trader

• Insurance for the self-employed: Everything you need to know