With more and more people running their business from home a recurring question we get is if a business owner can build a garden office or remodel part of their house to serve as an office and put the expenses through their limited company. The short answer is yes, but the end tax result may be not what you expect.
- Which build expenses are allowable for Corporation tax
Whether the building is a DIY construction or a ready-made office, the expenditure on buildings, foundations, and structure is not tax-deductible as either an expense or capital allowance against profits. Design and costs directly associated with building and installing the office, including delivery charges, count as the cost of the structure and are not tax-deductible. The cost of initial decoration also falls within this category; Note that you are not able to claim Structures and Buildings Allowance (similar to Capital allowances but with 3% rate p/a) as buildings located within the grounds of a residence are specifically excluded. Subsequent repairs, including redecoration costs, are allowed.
However, capital allowances are available on plant and machinery. HMRC has a definitive list of claimable items, and the contractor must itemise their invoice accordingly to show items that can be claimed. Such items include:
- any thermal insulation of the building;
- any personal security required;
- integral features – electrical system (including lighting);
- space or water-heating systems;
- powered systems of ventilation, air cooling or air purification and any floor or ceiling comprised in such a system;
- external solar shading;
- kitchen equipment and fittings;
- washbasins/sinks/sanitary ware;
- furniture and furnishings (e.g. curtains, desks etc.);
- fixings (e.g. shelves and systems);
- sound insulation;
- computer, telecommunication and surveillance systems including their specific wiring;
- fire alarm systems and other equipment for extinguishing or containing fires; and
- burglar alarm systems.
The cost of heating and lighting the office is tax-deductible, as is the supply of water, if metered separately from the home. If no separate meter a reasonable allocation can be made based in usage and floor area.
A quick note on movable objects – containers/ caravans etc – these can be considered as plant and machinery and qualify in its entirety for capital allowances
- VAT
VAT can be reclaimed on the whole build (including ready made purchase of an office) as long as the building is to be used at least partially for business purposes (HMRC VAT guidance note 700 12.2.2). If there is private use, a reasonable allocation needs to be made based on the use and only the business portion of the VAT can be reclaimed. You should carefully document the basis used to apportion the VAT between business and non-business purposes in case there is a query from HMRC. Note interaction with capital gains below – if not exclusively used for business purposes, then able to rely on PPR relief from capital gains.
If there is doubt about the recoverability of VAT or the business/private allocation you can seek HMRC’s pre-approval/guidance.
- Capital gains
There is no capital gains tax (CGT) to pay on any gain arising on the sale of a person’s only or main home (Private Residence Relief – PRR). However, the full extent of this exemption may be compromised where part of the home is used for business purposes. Private residence relief is only available to the extent that the property is used as a home.
When creating a home office, it is necessary to consider the impact that this will have on the availability of private residence relief on any gain arising from the sale of the home.
A key consideration is whether the home office will be used exclusively for business purposes. If the answer is yes, then it will not qualify for private residence relief. This will mean that when the property is sold, the gain will need to be apportioned on a just and reasonable basis. The portion that relates to the home office will be liable to CGT. The percentage of floor space of the office vs the whole house is usually a good proxy.
In some cases, the fact that using a home office solely for business purposes may trigger a chargeable gain on sale may not matter. The gain that is brought into charge may be covered by the annual CGT exemption (£12,300 for 2022/23) leaving no taxable gain. This is doubled where the property is jointly owned.
However, if the gain is large or the homeowner is likely to use the annual exemption by realising other gains, it may be sensible to use the space for both business and private purposes, to preserve entitlement to the private residence exemption. For example, if the room/office is used 10% of the time to pursue a private hobby the gain will still be eligible for 100% PRR. But note the interaction with VAT above.
It could be argued that ToCGA 1992 s224(1) is written in the present tense and if the business use has stopped before the sale of the house it would not compromise PRR relief in full. That said s224(2) gives HMRC the power to adjust the relief to what they consider reasonable if there have been changes as regards the use of part of the dwelling-house for a trade or business at any time in the period of ownership. Relying on S224(1) may still be appropriate though if we are considering a garden office rather than a garage or loft conversion that is an integral part of the dwelling-house.
We need to look into two other scenarios.
- What happens if you close the company – if the company pays for the build we need to capitalise the portion of the build that is not plant and machinery as buildings at the onset. The extension/garden office needs to be sold to the director before the company is closed. At this point as the money will likely need to be drawn back as dividends the director will incur personal tax. When closing the company it is possible to choose a capital distribution route for releasing the cash which will reduce the tax.
- What happens if you sell the property – Similar to the above, the company will need to sell the capitalised building to the director at market value with a valuation of the building obtained as evidence that a reasonable market value was paid. If the extension is brick and mortar it is likely to have gone up in value which will trigger corporation tax on the disposal.
- Benefit in Kind
If the new office is not used solely for business, this may give rise to a Benefit in Kind charge for the director/employee as the office room is built with company money and belongs to the company. In this case, unless the office is hired, the cash equivalent of the office to be assessed each year as a benefit will be 20% of the market value of the asset when first made available – most likely the cost of the asset when new. Long term this will create a very significant personal tax charge. A potential way to circumvent this will be for the company to hire the office to the director for personal use. If we can assume a yearly rent of £5,000 for an equivalent office in the area, and that the director is allowed to use the office for personal needs 10% of the time, say a rent of £500 p/a can be used which will have fairly minimal tax impact on the company. Furthermore, it will be additional evidence that there was a private use.
- Business rates
When creating a home office you may also have to consider business rates, as you may have to pay business rates on that part of your office that you use for your business. Business rates are payable if the Valuation Office Agency give a rateable value to your home. This will also apply if you build a separate home office in the garden. When planning the project it is advisable to contact the Valuation Office Agency to ascertain the business rate implications. Council tax will remain payable on that part of the home which is used for domestic purposes. You might be able to claim the small business rate relief.
- Planning permission
Depending on the nature of the business, you may need planning permission to run it from your home. Again, depending on the type of business, you may need a licence. You should contact your Local Authority for advice.
- Mortgage
Using part of your home for a business, or indeed creating a home office, may affect your mortgage. You should inform your lender of your plans.
- Insurance
You may want to check with your insurer on the implications of the new build
- Legal matters
Granting a lease to the company so the company has a legal basis to own the build may be necessary.
Conclusion
Building an office in your back garden or refurbishing part of your existing house as an office and expensing it through your company has many tax pitfalls. Each case needs to be reviewed for its merit taking into consideration the likelihood of property appreciation, the importance of cashflow timing, and the opportunity costs of paying for the project from your personal money (forgoing the ability to charge the company rent for an office is a significant one). We recommend working with a tax professional to develop an optimal strategy for your particular case.
