A guide to claiming the costs of setting up your home working space.
The Trend
The number of people working from home has been on the rise over the last few years with hot desk working and remote desk-hopping becoming more popular. With the current situation, most individuals are looking at ways to make this a more permanent solution. It is no wonder that many are finding imaginative ways in which to set up their home office.
Some people are more than happy to work at their kitchen table, while some prefer a dedicated room with a full office set-up. For others, particularly those who love the idea of a 30-second commute from bed to desk, but have the constant feeling of never really leaving work because their office is just another room in the home, a garden office is the perfect option.
Whether you are extending your home or installing a garden pod, there are several factors that need to be weighed up when deciding if your company should be footing the bill. There may certainly be VAT and income tax benefits to be gained. However, potential complications include ineligibility for capital allowances, personal use of the office attracting a benefit in kind charge, and business rates being levied on what may be classed as a business property by the local authority.
The VAT benefits
If your limited company is VAT registered and not under the flat rate scheme, it can pay for the purchase price of the garden office and its fit-out with communications and utilities, including the running costs such as electrical wiring, plumbing, and heating. It can also claim back the VAT on the costs.
If you are on the VAT flat rate scheme it is more complicated. You are not able to claim back VAT on purchases for the garden office unless you spend over £2,000 on one single purchase of capital expenditure. Because the building will no doubt contain expenditure from both goods and services – so the actual building itself being the goods, and the installation being the services – you will require the invoice from your suppliers to split the costs into the two categories. You will then be able to claim back VAT from the goods, which will likely cost at least £2,000.
If there is no private use allowed by the director or the family then all the VAT can be claimed back. If there is some private use, then the VAT must be restricted and calculated on a fair and reasonable basis. This applies to companies that are standard rate registered only.
This means working out the pro-rata personal and business usage. So, if a contractor uses the office exclusively for business Monday to Friday and the family uses it for games and TV at the weekend, the contractor will claim back 5/7 of the VAT.
The Annual Investment Allowance
As a garden office is normally classed as a structure, it is not usually possible to claim tax relief on one – including planning, building and installation – even if it is mobile. Structures and buildings are one class of assets that do not qualify for AIA.
Tax relief can be obtained through capital allowances on any furniture or equipment installed into the building such as desks and shelving units.
Despite thermal insulation, certain electrical wiring and plumbing technically being included within the structure of the building, you can actually claim a capital allowance on these. Running costs for the outbuilding, so electricity, gas and water can be claimed as business expenses. This also applies to repairs.
Benefit in kind (BIK)
If you intend on using your garden office for personal affairs, such as somewhere for your children to play, a guest room for visitors, or even something as simple as a place for you to relax and read a book at the weekend, or store personal belongings, be aware that you will incur personal tax costs, i.e. benefits in kind.
Even if you have genuinely installed a garden office for the sole use of working from home, it can be extremely difficult to prove to HMRC that you do not intend to use the building for any personal matters whatsoever, so you should bear this in mind, and be prepared to pay this benefit in kind tax.
Capital gains tax (CGT)
Tax legislation exempts the sale of a principal residence from capital gains tax, and this principle will apply to a contractor with a home office in their house as long as there is no exclusive business use on any part of the contractor’s property.
For contractors with an office in a spare bedroom, this is rarely a problem, as evening, weekend and guest use of the home office prevents it being classed as exclusively used for business.
But if a contractor has bought a garden office exclusively for business use and put it on their land, and the office represents 5% of the total floor area, then 5% of the gain when the contractor comes to sell their home will be chargeable to capital gains tax unless there is mixed-use. The contractor might also have to consider whether the company is due any share of any sale proceeds when the shed is sold with the house.
A bit of mixed-use of the garden office will get around the CGT, but then you would be liable for a benefit in kind (BIK) income tax charge on the benefit you are gaining from the use of what is a company asset.
It is worth bearing in mind that different types of building may be more likely to be subject to capital gains tax than others. If your garden office is a brand-new building made up of bricks and mortar with state-of-the-art insulation and all the mod cons, it will devalue at a much slower pace than an upgraded wooden shed, and this may affect CGT implications.
Business rates and planning permission
In most cases, it is not normal to have business rates levied by your local authority on a garden office, although they might do if you have made structural changes to the property.
You should contact your local authority and explain what you are planning. This is important for two reasons. Firstly, the office may require planning permission.
Secondly, if the local authority is planning to levy business rates, it is best that you know from the outset so you don’t have a nasty surprise and a bill of thousands of pounds twelve months down the line.
So is it worthwhile for your company to pay the bill?
With FRS complications, capital allowances, capital gains tax, benefit in kind and business rates, you may wonder whether there really is any benefit to be gained from buying the office as a business expense.
At the very least, if you are VAT registered, you will save 20% of the costs of your build (Less if you are not standard rate registered). But even if you are registered under the flat rate scheme, you will be able to claim back some of your VAT.
The other important point to consider is that if you are funding the extension or build personally – where would these funds come from? Assuming that it would be from the profits generated in your limited company, you would be paying personal tax on these funds. And depending on the costs, this may push you into a higher tax bracket too.
Sure, if your company pays, you will not be saving the corporation tax on the purchase – but at least you will not be paying a personal tax bill on your dividend.