With many more people working from home due to the COVID-19 pandemic, and the number of remote workers only set to rise, some will inevitably need to convert home space into an office.
Working from the kitchen table might be ok as a temporary solution, but if you’ve got children around, a dedicated workspace can help avoid disasters! The novelty of ad-hoc remote working can wear thin quickly too. Especially without the right space and equipment, and when there’s no separation between work and home.
For some people, a garden or outbuilding office space is the perfect solution. These can range from as little as £1,000 for a DIY style cabin with little to no insulation (great during summer, but not so for most of the year!), to £20,000 for a bespoke option with all the mod cons.
There are plenty of options to consider. But can your limited company pay for the cost of doing it, and what are the implications for tax?
Is it tax efficient to pay for a garden office through my limited company?
While you can certainly pay for a garden or converted garage office through your limited company, as with all tax-based queries, there are lots of particulars to consider. Especially regarding tax relief.
A garden office is normally classed as a structure, which means it’s not usually possible to claim tax relief on it. This includes planning, building and installation, even if it’s mobile.
However, tax relief can be obtained through capital allowances on any furniture or equipment installed into the building, e.g. desks, seating shelving and so on.
The same goes for converting a garage or room in your house. If it’s your personal property, it’s worth noting that this is considered an improvement to the property – although it can be paid for through your limited company, it can’t be deducted from profits for tax purposes. It’s what’s known as an “add back”, which means it’s added back to any profits or losses to arrive at a taxable profit.
Services into the building (electrical wiring, thermal insulation, and plumbing) do count as capital allowances, however. Running costs for your office (e.g. electricity, gas, and water) can be claimed as business expenses. This also applies to repairs.
What are the tax implications if my home office space has a personal use too?
If you plan on using your garden / home office for personal activities, such as a playroom for your children, a spare room for visitors, or even just a place for you to relax and do some cross-stitch, be aware that you will incur personal tax costs, i.e. benefits in kind.
Even if you’ve genuinely installed a garden office or converted your garage for the sole use of working from home, it can be pretty darn hard to prove to HMRC that it will have no personal use whatsoever. After all, it’s your personal home too.
So, before you decide to put these costs through your business, you should bear this in mind, and be prepared to pay this benefit in kind tax.
Are there any VAT benefits to paying for a home office through my company?
If your company is VAT registered and not under the flat rate scheme, it can pay for the purchase price of the outbuilding or room conversion and its contents – including the running costs such as electrical wiring, plumbing and heating – and claim back VAT on the cost.
For companies on the flat rate VAT scheme, it gets a little more complicated. You’ll be unable to claim VAT on purchases for your home office unless it’s on a single capital expenditure above £2,000.
The construction or conversion of the office will require expenditure for both goods and services (the building / structure being the goods, installation being services). To claim back tax, you’ll therefore need separate invoices from suppliers for each category.
As with other mixed-use allowances, if your office space will also have personal use, you’ll need to make an adjustment for this part.
Are there any other taxes I should know about?
Yes, possibly Capital Gains Tax, but you’ll only need to worry about this if you’re planning to sell your house soon; if you sell it for more than it cost; and if you’ve used part of it for business.
There are two rules which determine if and how much of this increase in value is taxable.
Which of these applies depends on whether you used your home as self-employed (this includes being a business partner) or an employee (or director):
If you used any part of your home exclusively for business, the gain relating to that part must be worked out separately from the rest of the property.
Any reasonable method of doing this is acceptable. Usually, you can split the gain according to the area of your home used for business and, if it wasn’t used for business for the entire period you owned it, the amount of time for which it was used.
The part of the increase in value that was due to you converting your home space into an office doesn’t qualify for a tax relief called Principal Private Residence Relief.
Directors and employees
If you use part of your property for any purpose other than as your home, e.g. for your business or and/or during employment, HMRC can reduce the PPR (by a ‘just and reasonable’ amount) you’re entitled to claim against the total gain made from selling your home.
It’s worth bearing in mind that different building types can be more likely to attract capital gains tax. A brand-new bricks and mortar garden office including mod cons will devalue far slower than an upgraded potting shed.
Will I have to pay business rates?
This depends. If you’re unsure, it’s best to check the government guidance on business rates for working from home.
To summarise, if you’re using a small part of your home then you’re unlikely to need to pay business rates. If you make changes to your home – such as building a new structure or converting an existing one – you may need to.
A garden office might fall into the grey area in between, so it’s a good idea to check with your local authority first. That way you can plan for this potential cost as well as the tax implications already mentioned.