Creating an Office at Home

Creating an Office at Home

Creating an Office at Home

Many company owners work from home. This note looks at how you may obtain home office tax relief on the cost of creating an office at home. If you are planning to convert the spare room into an office, you should read this article.

  • A director can reclaim any expenses incurred when working from home from his company.
  • Alternatively, he can charge his company rent required to work from home or where the place of work is home provided that there is a license agreement in place.

Claiming the costs of creating an office at home throws up several different tax concerns for a director.

If the director incurs the cost himself, he needs to consider:

  • Capital Gains Tax (CGT) treatment of capital costs
  • VAT
  • Stamp Duty Land Tax
  • Capital allowances on fixtures and plant and machinery
  • Treatment of repairs and renewals

If his company incurs the cost (or reimburses his expenses) he needs to consider:

  • PAYE and NICs including the benefits code
  • VAT
  • Capital allowances
  • Treatment of repairs and renewals

 

Modification and conversion works

 

These types of costs will generally be treated as capital expenditure, whoever incurs them.

 

Building an office or workshop

 

These costs will be treated as capital expenditure, whoever incurs them.

 

Repairs and renewals

 

Modification may include some expenditures of repairs such as redecorating, replacement of old floors or windows, or floor coverings.

 

Tax consequences if the director incurs the costs

 

Capital costs and Capital Gains Tax (CGT)

 

  • A private residence is exempt from CGT if it qualifies as a principal Private Residence (Private Residence Relief – PRR applies); however, there is no exemption where you’re converting a house into a business and utilize it for business purposes. When a part of the home is converted to the office, that part of the house should still qualify for PRR for the 18 months after conversion.
  • The same will apply if part of the garden or grounds is for business use.
  • If the grounds exceed .5 hectare, PRR may likely be restricted in any case.
  • PRR relief is restricted, any gain on the disposal of a business asset (as apportioned) should qualify for CGT Entrepreneurs’ Relief. If this is in connection with a sale of the business or retirement, however, this will not be available if the property has been let to the director’s company.
  • In general, a director will be at a CGT disadvantage in claiming the capital costs of creating an office at home unless property prices are falling: in that case, a capital loss could be created when the property is sold.

 

VAT

 

  • In most cases, directors are not VAT registered in their capacity.
  • Suppose the director has constructed an outbuilding for home office conversion or to rent out to his company. He could consider registering for VAT and opting to tax the building.
  • Opting to tax would allow him as an individual to reclaim VAT, see Working from home (directors) for further discussion.

 

Stamp Duty Land Tax (SDLT)

 

  • The buyer pays SDLT
  • SDLT will be charged at residential rates when the director sells his private residence, providing that the home is suitable for use as a dwelling.
  • “Suitable for use” is something that has to be judged at the time of the transaction, so past use or intended use is not considered.
  • Where a house is used as a B & B or guest house HMRC recommends that each case should be taken on its merits: if all the bedrooms have separate facilities and are available for letting all the year-round, it will be treated as non-residential.
  • If part of the property is not suitable for residential use, the mixed-use SDLT provisions will apply. These broadly apportion the consideration on a just and reasonable basis.
  • HMRC considers that “outhouses” will be treated as residential property unless they have a specific non-residential purpose.

 

Capital allowances

 

  • A director will be able to claim capital allowances on the cost of any fixtures or plant and machinery which he purchases for converting the home into an office. However, there is a restriction when a residential property is used for letting, and the director is also unlikely to be able to reclaim the VAT. There are also PAYE and NICs concerns in respect of fixtures (see below). To this end, it might be sensible for the company to incur the cost of purchasing any moveable plant and machinery instead.
  • The position with fixtures is not straightforward because it is thought unlikely that HMRC will allow the company to claim back VAT on the cost of something that is fixed to the director’s personal property. It may also be difficult to prove that there is no private use of a fixture, which means that this could trigger a PAYE and NICs charge for the use of the asset as well.
  • When the property is sold, and capital allowances have been claimed on fixtures, an election covering fixtures may be a consideration.

 

Repairs and renewals

 

  • A director will be able to claim the cost of repairs and renewals as a deduction against any rental income received if he has a license in place with his company, and the expenditure is incurred:
    • Wholly and necessary for the purposes of letting, or a proportion of the cost is attributable to business use.
  • Any reasonable basis can be used to apportion business use; commonly, this is done on the basis of :
    • The number of rooms in the house
    • Floor space, or area
    • Time in use

 

Alternatively, the director can recharge the cost of repairs and renewals to his company as part of a home working expense claim. However, he should not reclaim any expense that has been incurred for mixed business and private use without weighing up the PAYE treatment of pecuniary liabilities consequences.

 

If the company incurs the cost (or reimburses the director’s costs)

 

  • PAYE and NICs and benefits
  • VAT
  • Capital allowances on fixtures and plant and machinery
  • Treatment of repairs and renewals

 

PAYE and NIC aspects

 

It is strongly advised to ensure that there is paperwork to explain who is doing what and paying for what during the building process.

 

The company pays the director’s bills

 

  • If the company pays any bills, which are the director’s personal liability, this is “settling his pecuniary liability.” The cost is immediately subject Class 1 NICs as earnings. However, for income tax purposes, this is a benefit in kind to be included in box B of form P11D unless the director “makes good” the cost (see below).
  • This type of expense can simply be payrolled, see Payrolling of benefits.
  • Or if the director has a credit balance on his loan account, the cost can be offset against the loan. It is advised to agree to this before the expense is incurred.
  • When income tax applies, this is a one-off tax charge; tax is charged in the year in which the company incurs the cost, For example, where the company pays for the director’s light and heat at his home.

 

Company assets made available to an employee

 

  • If the company constructs manufacture or purchases an asset that is then made available to a director for private use. There will be an ongoing annual taxable benefit in kind for each year in which the asset is made available.
  • The benefit will be calculated under s205 ITEPA 2003, at 20% of the higher of :
    • The cost, unless the asset is land/buildings, in which case the annual rental value is used, and
    • Actual annual costs incurred by the employer.

For example, if the company rents a satellite dish which it attaches to the director’s home and he and his family benefit from it. The benefit will be the higher of 20% of the cost or the annual rental cost paid by the employer.

 

Company construction of assets on a director’s land

 

If the company creates an asset that is fixed to the director’s private land, such as building for personal use, the taxable value of the benefit will be it’s cost less any amounts Made Good by the director.

  • This is a one-off tax charge per s204 ITEPA 2003, made in the year in which the benefit is provided.
  • If the building is then also used privately, there is no additional charge.  But there will be an ongoing benefit in respect of expenses if the company is providing services. Such as light and heat in addition to the use of the building.
  • For example, the company constructs a garage for the director at his home, and he uses it to store and restore his car collection.
  • Note that where the employer is a builder, the costs of construction will be the higher salaries of the workers used or the expenses of contractors engaged in fulfilling the workers’ regular duties while they worked on this project.
  • Case: Richard Denny v HMRC [2013] TC02714 (company improvements to property and yacht benefit)

 

Transfer of asset to director

 

Non-depreciating assets: land and property

  • If the company has acquired an asset, which is later transferred to the director at an undervalue, a tax charge will arise under s62 ITEPA 2003.
  • Case Langham v Velthema STC3717 a company transferred a house to its director at an undervalue, and the director was assessed on the difference between market value and the amount paid.

Where assets are depreciating assets, this would include temporary structures. Such as caravans or static caravans, perhaps wooden cabins which have a short life. Section 206 provides that an asset which has been used or depreciated and then transferred to an employee will be taxed at the higher amount of :

  • The market value of the asset at the date of transfer or
  • The market value of the asset when first made available for the private use of a director less the aggregate of the amount of the cost of the benefit during the period when it was provided as a benefit (calculated according to s205) less
  • any sum paid by the individual receiving the asset to the person transferring it.

 

VAT and capital costs

 

HMRC will disallow any claim to input tax if the expenditure is incurred for the private benefit of a director.

  • A company can reclaim the VAT on the purchase of business assets. So it can still reclaim the cost of VAT on any equipment used by the director in the home office.
  • It may be possible for the company to reclaim part of the input tax on any conversion costs incurred. When converting an outbuilding or completing internal modifications to create an office or workshop provided that there is a license in place and any private benefit received by the director is minor, see the VAT section of Working from home.

 

Capital allowances

 

  • A company is able to claim capital allowances on the cost of equipment purchased for creating an office at home.
  • It may be possible to claim capital allowances on the cost of fixtures. However, fixtures are immovable, and so the ownership of the fixtures passes to the director. It then be difficult to try and argue that the cost was incurred for the purposes of the company’s trade. The director may, as an employee, claim capital allowances on the plant which he provides for the company.

 

Repairs

 

  • A company can claim the cost of repairs, renewals, and VAT in respect of any building that it occupies.
  • A claim may be disallowed if the expense also benefits the director. As it will not be wholly and necessarily incurred for the purposes of the business.

Are you looking for a tech-savvy accountant who doesn’t bore you with finance details? Let our accountants in London make things easier to understand for you. We’re friendly, proactive, young and keep up with all the latest developments in your business to make sure you’re on top of your game.

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