Because more people are currently forced to work from home due to the coronavirus pandemic we thought we'd cover the available tax deductions for working from home. In this article we'll cover the tax relief available whether you run your business as a sole trader, partnership or limited company
If your business has essentially become home based then you might be considering building an outside office or converting part of your home. If that's the case what expenses can you claim and what are the tax implications?
Construction or conversion costs
This type of expenditure will generally be treated as capital expenditure and thus not deductible for corporation or income tax purposes regardless of who incurs them.
However any modification or conversion might include some expenditure which can be treated as repairs and renewals. For example, redecorating, replacement of old floors or windows, or floor coverings.
What happens if the business owner incurs these costs personally?
Your property potentially qualifies for exemption from capital gains tax if it is regarded as your main residence. However a restriction applies where part of your home is used exclusively for business purposes
If part of your home is converted into an office of part of your garden is used for business (for example because an outside office is constructed) this should still qualify for the exemption provided there is non exclusive business use.
If main residence relief is restricted because of exclusive business use then the proportion of the gain on the property relating to business could potentially qualify for entrepreneurs' relief. However relief for this part of the property will not be available if this has been let to your limited company.
Generally speaking there is no capital gains tax advantage in claiming for these costs unless property prices are falling
What about fixtures and fittings?
You will be able to claim capital allowances using the annual investment allowance for any fixtures or plant and machinery (e.g. desk) which is used to convert or create a home office. If you are a director of a limited company it would usually make sense for the company to incur the cost of purchasing any plant and machinery
The position is a little less straight forward where fixtures are purchased by your company. HM Revenue are likely to take the view that the company cannot reclaim VAT on the cost of an item that is essentially fixed to your personal property. It might also be argued that there is some private use of a fixture by a director which in turn could trigger a tax and national insurance charge.
Repairs and renewals
If you're a director you'll usually be able to claim the cost of any repairs or renewals as a tax deduction against any rental income received from your company though only that relevant proportion that is attributable to business use. If you're a sole trader or partner the deduction would be made against your business profits.
You would normally calculate this proportion on the basis of the number of rooms in your property, floor space and periods use for business.
What if my company pays or reimburses any conversion costs?
If your company pays for any conversion costs in your home, strictly speaking these are your personal liability. HM Revenue are likely to regard these as earnings which are subject to both income tax and national insurance and potentially reportable on form P11D. The charge arises in the year in which your company incurs the cost. The tax and national insurance charge can be avoided if you reimburse your company for these costs. Alternatively if you have sufficient credit balance on your director's loan account any costs can be offset against your loan account. However we would recommend formalising this before the expenditure is incurred.
What if my company pays or reimburses any construction costs?
If your company pays for the construction costs of a home office in your garden which is available for private use there will be a taxable benefit. This is based on the construction cost (though see below) less any amounts paid personally by the director (see above). The tax and national insurance liability arises in the year of construction. There is no other subsequent tax charge if the home office is used privately. However you will be taxed on the value of any ongoing benefit paid for by the company for example heat and lighting.
If your company operates in the building trade then the construction costs (for calculating the taxable benefit) will be the higher of the following:
- The salaries of the employees working on the project
- The cost of any contractors used to fulfil the director's normal duties whilst they work on this project
Additional assets purchased by the company
If your company purchases additional assets for the home office such as Hi Fi equipment, paintings or a TV satellite dish which are used privately there will be an ongoing taxable benefit in kind for each year the asset is made available. The taxable benefit is calculated at 20% of the higher of purchase cost or the actual annual costs incurred by your company.
What about the Stamp Duty and VAT position?
If you are not registered for VAT as an individual (for example as a company director) then you would not be able to recover the VAT on any construction costs for an outside office. However if you could consider registering for VAT and opting to tax the building. This would allow you to reclaim VAT on any associated costs.
Stamp Duty Land Tax is usually charged at residential rates when an individual sells their home provided it is suitable for use as a dwelling on the date of sale. If part of the property is not suitable for residential use then the mixed use Stamp Duty Land Tax provisions apply. Generally speaking HM Revenue considers 'outhouses' to be treated as residential unless they have a specified non-residential purpose.