Costs of Converting a Room/Building an Office in the Garden at Home for Business
It is possible to make a case for the cost of the work to be borne by your company but there are tax implications of doing this.
The main advantage of putting the building costs through the company is that you can recover the VAT on the building costs, provided of course your business is VAT registered and not on the Flat Rate Scheme.
Where the costs are paid for by the company and not treated as private payments (e.g. additional drawings/dividends), the cost of the works essentially becomes a fixed asset of the company (probably “Leasehold/Building Improvements”). This means that this part of the house is no longer an asset owned personally but is owned by the company. This in turn means that when you come to sell your house, the total proceeds need to be split between the rest of the house which is personally owned and the new office, now owned by the company. The part allocated to your main home, excluding the office, should be tax free, as any capital gains tax should be exempted in full by virtue of “principal private residence“ relief. However the sale proceeds attributable to the office go into the company and are potentially taxable on the company. Whether the company pays corporation tax on the capital gain depends on whether there is a capital gain – a capital gain arises where the sale proceeds relating to the office exceed the original cost plus indexation allowance between the date of the build and the date of sale (indexation allowance seeks to strip out gains caused only by inflation as opposed to a real gain).
Strictly, there is a requirement to notify the local council so that they can assess that part of the house to business rates as opposed to the lower domestic rates. In practice, I am not aware of any of my clients who work from home having done this and none have been “found out”. Provided you do not have lots of visitors to the house because of the business, it is unlikely that neighbours would / could object to you using part of your home as an office and thus feel the need to “tip off” the council on this point.
Where the costs of the building work are treated as a company asset, you need to split all the costs into 3 separate components:
a) Pure capital costs – these go on the balance sheet within “Leasehold/Building” but no tax relief is available. This is because these are capital as opposed to revenue costs. Unfortunately no tax relief is available for the cost of assets which simply are the setting within which the business is carried out.
b) Plant & Machinery, fixtures & fittings, computer costs – these assets are now more than just the setting within which we carry out our business but are the “tools” with which you carry on the business. As such we can now claim tax relief (known as annual investment allowances or capital allowances) on these fixed asset costs. You get 100% relief on such costs up to a current annual maximum of £200,000 a year qualify (the limit was £500,000 from 1 April 2014 to 31 December 2015).
c) Integral Features. The cost of these items can be within the current £200,000 AIA and thus qualify for 100% tax relief. If exceptionally the cost of such items were to exceed £200K, the excess would still attract tax relief, albeit at just 10% a year. However, 10% a year is better than a) above where you get no tax relief. Integral features comprise:
- an electrical system (including a lighting system)
- a cold water system
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system
- a lift, an escalator or a moving walkway
- external solar shading
More information about integral features can be found at the following link to HMRC’s website: rel="nofollow">http://www.hmrc.gov.uk/manuals/camanual/ca22320.htm
You may wish to have a quick read of this link and revert to me with any further questions.
Obviously the more costs within b) and c) than a), the better. However, you need to be able to support the decision you make as to the split of costs. The more detailed the invoices from the builder and the more he can legitimately allocate to b) and c) the better.
Regardless of whether the building costs are put through the company or treated as private costs, the ongoing costs of operating from the new office can go through the company. This is achieved by putting in place a formal licence agreement. This ensures:
a) The amounts paid to you cannot be reclassified by HMRC as a taxable benefit from the company.
b) The costs attract tax relief/save corporation tax for the company.
I attach below a copy of a covering letter we send to clients on this which I hope is self-explanatory and a copy of the actual Licence Agreement.
If we have already put in place a licence agreement for your business, you should now provide us with the figures again as:
(i) The actual costs relating to your home may well have increased as result of the building work done; and
(ii) The fraction used to work out what proportion of the actual costs we can claim will almost certainly have changed.
Please do call me if you have queries on this matter.
This fact sheet is for information only. It provides an overview of the regulations currently in force and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person or refraining from action as a result of this material can be accepted by the authors or the firm.