More people are working from home due to the pandemic, and many business owners are considering creating a dedicated home or garden office.
However, there are several things to be considered before doing this.
Tax on construction/conversion
When building a dedicated office from scratch, for example, a garden office, or a part of your home is converted explicitly for use as an office, it is a common misconception that the construction will qualify for tax relief. However, this is not the case. Being capital in nature, construction costs are not costs incurred on plant, and so do not meet the requirements of the Capital Allowances Act for tax relief.
After construction, equipping the office with, for example, shelving and furnishings for work, IT, telephone, etc., should however qualify for capital allowances and secure a tax reduction.
VAT on construction/conversion
If you are not on the VAT Flat Rate Scheme, and the business is VAT registered and pays for the office, it should be possible to reclaim VAT on construction costs, although this is not necessarily a straightforward matter. If there is any private use of the office area, the proportion of VAT that can be reclaimed is limited on a “just and proportionate” basis, allowing only the business use element.
VAT should be reclaimable on the costs of furnishings and equipment, and the running costs of the office (electricity, gas, water, telephone etc.).
If you reclaim the VAT for just the business proportion but go on to make any exempt supplies, you will be subject to clawback. You will need to recalculate the input tax reclaimed in previous periods and pay back the difference.
If you are on the VAT Flat Rate Scheme, then you should seek bespoke advice.
Depending on the costs involved, there may also be implications when you sell your home, in that VAT may be chargeable on part of the proceeds, and have to be accounted for to HMRC. However, the limit before this applies is generous, and it is improbable that you would exceed that threshold.
Personal tax implications
If you have a limited company and the company pays for your home office, there may be a Benefit in Kind to report in respect of any private use. This would, in turn, give rise to both a personal tax charge and a charge to Class 1A National Insurance for the company.
Whilst no Benefit in Kind will arise if the office is used exclusively for business, it is notoriously difficult to convince HMRC that there will be no private use of what is, effectively, a part of your home.
Capital Gains Tax
If the home office is used exclusively for business purposes, it may adversely affect the capital gains tax exemption for your principal private residence. When you eventually sell your home, the relief will be restricted, and a capital gains tax charge may arise.
Tax – General
It is probably worth highlighting that tax legislation is not consistent across the different taxes, and definitions may differ. This can be particularly relevant where, for example, this disparity produces unfavourable results across different categories of tax.
Where a construction is made exclusively for business purposes, the local authority may deem the office to be business premises and chargeable to business rates. Before proceeding, you should speak to the local valuer for advice.
If you intend to have clients or customers visiting your home office, you may need to consider public liability insurance.
If you are thinking of creating a home office and have any questions on the above, please don’t hesitate to contact us.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.