The deduction of home office expenses by self-employed workers
What expenses which can be deducted by a self-employed worker who works at home in his/her personal income tax return. It is quite clear that expenses associated with the ownership of the home (i.e. the real estate tax, service charges paid to a condominium owners’ association, or the refuse collection charge) which correspond to the number of square meters allocated to the pursuit of the professional activity are deductible, provided these meters have been duly declared in the worker’s tax census return. This has been established in various rulings of the Directorate General of Taxes. But does this mean that the utilities expenses (electricity, water, telephone etc.) which correspond to these same square meters can be deducted too?
This is where things get more complicated.
Until now, the Tax authorities had rejected the application of a partial deduction criterion in respect of these expenses on the grounds that there is no rational formula which can be used to determine the part of them which is incurred for private purposes and the part that corresponds to the professional activity. It therefore accepted them as deductible only when the supplies in question were used exclusively in the pursuit of the economic activity, which is rarely the case.
The Madrid High Court of Justice, however, in its Judgment of March 10, 2015, took a very different approach.
It concluded that if the legislation allows for the possibility of a dwelling being allocated in part to the pursuit of an economic activity, it makes no sense to reject the deduction of utilities expenses without which the use of the dwelling for such purpose would be wholly unfeasible. Accordingly, it accepted the deduction of the part of these expenses which corresponds to the percentage of the property which is allocated to the economic activity, as in the case of expenses related to its ownership.
In the face of these opposing views, the Central Economic-Administrative Tribunal (TEAC) has adopted a middle- ground position. Since there is no objective calculation method which can be used, the TEAC’s understanding is that expenses corresponding to supplies which the taxpayer can demonstrate have contributed to the economic activity pursued should, as a general rule, be deductible. It suggests the use of a combined criterion which takes into account both the number of square meters and the days and hours over which the activity is carried on in the property.
The Directorate General of Taxes has therefore been forced to modify its position. In a Ruling of January 20, 2016 it adopted the doctrine of the TEAC, affirming that “the deduction of utilities expenses of this kind when determining the net income obtained from the economic activity may be acceptable if the taxpayer is able to demonstrate their association with the obtaining of income». It also reminds us that “the deductibility of these expenses is conditional upon there being proper evidence to support them, in the form of the original invoice or invoice equivalent and their entry in the mandatory registers which taxpayers who engage in economic activities are required to keep.”
Our understanding is therefore that we can also expect to see a change in the position adopted by the tax authorities, with the focus of the debate shifting onto the supporting evidence which should be accepted for these purposes.
Garrigues’ Tax Department