Many company owners work from home, this note looks at how you may obtain tax relief on the cost of converting the spare room or building a deluxe summerhouse to serve as an office in the garden.
• A director can reclaim any expenses incurred when working from home from their company.
• Alternatively, you can charge the company rent if you are required to work from home, or where the business is based at home provided that there is a licence agreement in place.
Claiming back the costs of converting part of a home into an office throws up several different tax concerns for a director.
If the director incurs the cost themselves, they need 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 costs) they need to consider:
• PAYE and NICs including the benefits code
• VAT
• Capital allowances
• Treatment of repairs and renewals
Overview and FAQ
Modification and conversion work
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 or conversion may include some expenditure which can be treated as repairs and renewals 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 main Private Residence (Private Residence Relief – PRR applies); however the exemption is restricted where part of a home is used for business.• When part of a home is converted 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 moved into business use.
• If the grounds exceed .5 hectare it is likely that PRR may be restricted in any case.
• If 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 a home office 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 individual capacity.
• If the director has constructed an outbuilding to rent out to their 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.
Stamp Duty Land Tax (SDLT)
• SDLT is paid by the buyer.
• 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 must be judged at the time of the transaction, so past use or intended use are 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 to convert or create a home 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 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 licence in place with his company and the expenditure is incurred:
o Wholly and necessarily 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:
o The number of rooms in the house
o Floor space, or area
o Time in use
Alternatively, the director can recharge the cost of repairs and renewals to the company as part of a home working expense claim. However, you should not reclaim any expense that has been incurred for mixed business and private use without weighing up the PAYE 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 who is paying for what during a building process.
Company pays director’s personal bills
• If the company pays any bills which are the director’s personal 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 on box B of form P11D, unless the director “makes good” the cost (see below).
• This type of expense can simply be payrolled.
• 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 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 home.
Company asset made available to an employee
• If the company constructs, manufactures or purchases an asset which 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:
o The cost, unless the asset is land/buildings, in which case the annual rental value is used, and
o 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 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 which is fixed to the director’s private land, such as building for personal use the taxable value of the benefit will be its cost less any amounts 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.
Note that where the employer is a builder, the costs of construction will be the higher of salaries of the workers used or the costs of contractors engaged to fulfil the workers’ normal duties while they worked on this project.
Transfer of asset to director
Where assets are depreciating assets, this would include temporary structures, such as caravans or static caravans, perhaps wooden cabins which have a short life: s206 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 plant and machinery 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 licence in place and any private benefit received by the director is minor.
Capital allowances
• A company will be able to claim capital allowances on the cost of plant and machinery purchased to convert or create a home office.
• It may be possible to claim capital allowances on the cost of fixtures however, fixtures are immoveable, and so the ownership of the fixtures passes to the director. It will 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 plant which he provides for the company.
Repairs
• A company can claim the cost of repairs and renewals and associated 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.
