As home working looks like it’s here to stay, we are being asked more and more about whether clients can pay for a garden office, or pod, through their limited company.
There is nothing preventing you from doing so, but it is vitally important to be aware of the potential tax implications that doing so will create, both for yourself and your company.
Let’s start with the tax implications for the company…
The first conclusion business owners jump to, is that if the company pays for it, it will get corporation tax deduction for the cost. This is not the case! As HMRC see it as a “capital” expense rather than a “revenue” you can’t get a tax deduction for the building’s cost. This means you can’t immediately reduce your business taxes for the money spent on building it.
To make matters worse, whereas most capital assets you can get tax relief over a number of years by way of a Capital Allowances claim, for prefabricated structures you can’t, even if they could technically be moved.
That being said, fitting the pod out with thermal insulation, fixtures, fittings and furniture would qualify for Capital Allowances.
You can also deduct running costs like heating, lighting, and repairs, but there may be some personal tax implications relating to private use, and it is often impractical to have separate supplies to the building, so you will have to come up with a fair and reasonable allocation.
The VAT position isn’t much better. You can get back the VAT you pay for the building and furniture if they’re used only for business (this is to be avoided because of the capital gains tax trap noted below). If you use it for both business and personal reasons, you can only reclaim the business part of the VAT.
If the structure is subject to an income tax charge (see below), then the company would also pay Class 1A National Insurance each year on the benefit at 13.8%.
The tax implications for the Director…
If the garden office is used for non-business purposes, then there would be a benefit in kind (BIK) income tax charge on the personal use. (BTW, HMRC are unlikely to accept there is no personal use at all).
The tax charge would be based on 20% of the market value when it’s first made available to the director.
Capital Gains Tax (CGT)
This is a potential trap that could prove very costly. If you are claiming that the office is used exclusively for business purposes, HMRC may argue that the land it sits on does not qualify for Principal Private Residence relief, and therefore there may be a CGT charge on the sale of your home. This would not be the case if it’s used for both business and personal use.
Non-tax implications to consider
Jealous neighbours tend to report anything they don’t like the look of. Even if your structure falls withing the permitted development rules, check with your local authority if you need permission to run a business from your home.
Following on from the above, if the council know you are running a business from part of your home, you might need to pay business rates for that part. Again, check with the local authority.
Building a garden office can affect your home insurance, so make sure you make full disclosure to your insurance company.
Using part of your home for a business could also impact your mortgage, so again, make full disclosure to your mortgage provider.
As with all business decisions, we are here as a sounding board and signpost, so please take advice before going ahead with your plans. We may help you avoid a costly mistake, and / or be able to come up with less painful alternatives! Call the team now on 01772 204102.