Technological advances means that many people now work from home, either running their own business or as an employee based at home. While many people may set aside an area of an existing room, such as a spare bedroom or dining room, as a home office, the idea of a dedicated home office space is undoubtedly attractive. Where existing space does not allow a room to be set aside as an office, one may be created, for example by building an extension, converting a loft or building a garden room.
Whichever route is taken, there are tax implications which need to be considered.
VAT
The ability (or otherwise) to reclaim VAT can make a major difference to the building cost. While a company cannot reclaim the VAT incurred in providing living accommodation for a director or an employee, it is possible to reclaim the VAT where the accommodation has a business purposes.
However, if the room is used partly for business and partly for private purposes only that part of the VAT which relates to the business proportion can be reclaimed. Any apportionment must be done on a just and reasonable basis.
Example 1 -Tony reclaims VAT on garage conversion
Tony is the director of his own personal company, T Ltd. He converts the garage in his home to create a home office, from which he runs his business. His company is VAT registered. The building costs are £30,000 plus VAT of £6,000.
If the garage conversion was used only for business purposes, T Ltd would be able to reclaim the all the VAT on the building costs.
However, Tony also uses part of the conversion as a games room. The home office accounts for 60% of the area, and the games room 40%. T Ltd reclaims 60% of the VAT associated with the conversion, as this represents the proportion used for business purposes.
When creating a home office, it is also necessary to decorate and furnish it. The VAT on any equipment used for business purposes can be recovered by the company. As regards the decorating costs, the VAT is recoverable to the extent the room is used for business purposes, making a reasonable apportionment where there is mixed use.
Trap:
Beware the complications where the VAT flat rate scheme is used – professional advice should be sought.
There is no facility for a home-based employee to recover the costs of creating a home office where those costs are met by the employee. It goes without saying that VAT can only be recovered by a VAT-registered business.
Capital gains tax
There is no capital gains tax (CGT) to pay on any gain arising on the sale of a person’s only or main home. 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 therefore necessary to consider the impact that this will have on the availability of private residence relief on any gain arising on the sale of the home.
The first question to consider 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.
Example 2 – Joan makes a chargeable gain
Joan is the director of her family company, J Ltd. She converts her loft to create a home office. The home office accounts for 8% of the floor space of her home. Assuming she sell her house and makes a gain of £100,000, £8,000 (i.e. 8%) would not be covered by the private residence exemption. Prior to making the apportionment, the gain would also be time-apportioned to reflect the period prior to the loft conversion during which the full gain would qualify for exemption.
In reality, the fact that using a home office solely for business purposes may trigger a chargeable gain on sale may not matter. In many instances, the gain that is bought into charge may be covered by the annual CGT exemption (£11,000 for 2014/15). 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.
Example 3 – Mixed use and PPR
Like Joan, Gill converts her loft to a home office from which she runs her web design business. However, she also uses the room as a sewing room.
As the room is used for business and private purposes, the private residence exemption is not lost.
Trap:
If the room is not used wholly for business, this may reduce the ability to reclaim the VAT.
Benefit-in-kind
If an employer pays for the conversion of, say, an employee’s loft or garage so that the employee can work from home, a benefit-in-kind charge may arise in relation to the costs of conversion, if the conversion is used for private as well as business 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.
Insurance
Building a home office may affect your house insurance. It would therefore be prudent to contact your insurance company and advise them of your plans.
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.
Practical Tip:
Consider the tax implications as part of the planning for your home office project, to avoid nasty surprises later on.
