Disclaimer: for this question, agree that you should consult a professional accountant for one to one advisory service as the answer should be depending on a case by case situation.
Let’s break the question into two parts:
(1) Whether a sole proprietor can claim rent and utilities from home office and health insurance as deductible expenses?
The quick answer is NO unless you can show proofs to IRD and convince the case officer that such expenses are used for business purpose, a general explanation as below
https://www.ird.gov.hk/eng/tax/bus_p...f=geoexpat.com
Non-deductible Items
In computing the assessable profits deduction is specifically prohibited in respect of the following:-
- domestic or private expenses and any sums not expended for the purpose of producing the profits;
- any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature;
- any sum recoverable under insurance or contract of indemnity;
- rent of or expenses relating to premises not occupied or used for the purpose of producing the profits;
- taxes payable under the I.R.O., except Salaries Tax paid in respect of employees' remuneration;
- any remuneration or interest on capital or loans payable to or, subject to section 16AA, contribution made to a mandatory provident fund scheme in respect of the proprietor or the proprietor's spouse or, in case of a partnership, to its partners or their spouses.
If you would like to argue with IRD that the expenses had a dual purpose, below is a more technical explanation from the DIPN for your reference, you have to prove that the intention and the major use of the expenses are business related
https://www.ird.gov.hk/eng/pdf/dipn0...f=geoexpat.com
Godfrey J agreed in Anthony Patrick Fahy trading as A.P. Fahy & Co. v. CIR 3 HKTC 695 that if an outgoing or expense had a dual purpose, partly of a domestic or private nature and partly for business purpose, it was not allowable to the extent that the outgoing or expense was a domestic or private character. He ruled that there could not be any sensible apportionment of medical expenses if those elements of the purpose could not be distinguished and the expense was one indivisible matter.
(2) Whether you will pay “less tax†after switching from an employee to a sole proprietor?
https://www.gov.hk/en/residents/taxe...f=geoexpat.com
A straightforward calculation, basic tax concerns are the salaries tax, first HKD200,000, tax amount is HKD16,000 (Effective tax rate at 8%), then, thereafter at 17%, or adopting a standard rate of 15%; then the profits tax, 8.25% on the assessable profits of first HKD2,000,000, thereafter 16.5%.
Because there are personal allowances and deductions under salaries tax, to enjoy the maximum tax benefits, we need to assume that you will hire yourself as an employer of your sole proprietor afterwards, that means:
- First portion of the new business income falls into the HKD200,000 + Your Personal Deductions and Allowances as taxable as salaries tax;
- Remaining portion of the new business income falls into the 8.25% profits tax rate
So, to enjoy “paying less tax†after switching from an employee to a sole proprietor, your New Business Income needs to be much higher than your current salary because you need to cover all the business expenses thereafter:
New Business Income – ALL business expenses (at 8.25%) > HKD200,000 + Your Personal Deductions and Allowances (at 8%)
Not to forget, for business expenses, there are tons of monetary, non-monetary and intangible elements that you need to consider, below with some examples
- Benefits and compensation (bonus, yearly salary increment, OT, allowances, holidays, medical benefits, employee compensation insurance, long service payment/awards, other retirement protection, MPF, training, professional license fees, … etc.)
- All of the fixed and variable expenses (office rent, tools, work equipment, furniture, raw materials, insurances, transportation)
- Additional time cost to handle business affairs (accounting, bank matters, company affairs, procurement)
- Intangible cost on bearing the business risk (1-2 months payment in lieu for finding a new job, any potential legal issue or third-party claim, cost on delay or redo the job due to any unpredictable reason (Typhoon, Protest, Wuhan Flu))
Most of the practical cases, in the end, even a person earns HKD50,000 a month won’t get much tax benefits. In general, instead of calculating the tax benefits, we will try to help our customers to calculate the possibility of creating other business incomes with potential growth to increase the overall income in the near future.
When you making the answer become a "YES", you are thinking about starting a business of your own with a ready customer, rather than putting high risk on commencing a business empty-handed.
Finally, the sole proprietor structure should only be used for a transitional time; with more customers, always consider to set up a limited company to avoid any personal liability in doing business.