With the rise in flexible working arrangements, more employees and self-employed professionals are considering home offices. While employees have the right to request flexible working from day one, it’s not a statutory right to work from home.
Many self-employed people, however, have already embraced homeworking as standard. If you work for yourself, our accountants for sole traders can help you understand which home office costs are allowable and how to record them properly.
For those with limited space, building an extension, converting a loft, or setting up a garden office may seem appealing, but these options come with specific tax implications based on employment status. This article explores the tax aspects to keep in mind.
Employer-Funded Office Construction
If your employer covers the cost of building a home office, HMRC treats this as a benefit-in-kind (BIK). The office is considered a company asset for personal benefit, which makes it taxable.
Tax Relief for Self-Employed Home Offices
For self-employed individuals, the rules are slightly different when it comes to building or converting space for a home office. These claims are usually dealt with through your Self Assessment tax return, so it’s important to keep clear records and avoid claiming costs that HMRC may challenge. Here’s what you need to know about eligible and ineligible tax deductions:
Ineligible Deductions
- Building Costs: Costs for the construction itself, like an extension, loft conversion, or garden room, are not tax-deductible.
- Office Setup: Installation and delivery expenses for pre-made office spaces are non-deductible.
- Initial Decoration: The first round of decorating is also counted as part of the building cost, so it doesn’t qualify for tax relief.
Eligible Deductions
- Repairs and Redecoration: Future repairs or redecorating costs after the office is built are deductible.
- Utilities: Heating, lighting, and water costs for business use (if separately metered) are allowable.
Claiming Capital Allowances
Although structural costs don’t qualify, capital allowances may be available for specific expenses related to setting up your office. Capital allowances cover items that are considered “plant and machinery” for business use:
Qualifying Items for Capital Allowances
- Thermal insulation
- Electrical systems
- Office furniture (e.g., desks, chairs, curtains)
- Kitchen fittings
- Washbasins and sanitaryware
- Fire alarms and security equipment
Tip: Ensure your contractor provides an itemised invoice that clearly identifies the qualifying capital expenditures, as these can be claimed only if you’re using the traditional (accruals) accounting method.
VAT Rules for Home Offices
VAT rules differ from income and corporation tax regulations. If you’re VAT registered, our VAT accountants can help you work out what can be reclaimed and how to apply a fair business-use percentage. Here’s how VAT applies to home office expenses:
- Running Costs: VAT on expenses like heating, lighting, and internet for business purposes can be reclaimed.
- Building Costs: VAT for building, buying, or decorating a ready-made office is reclaimable.
- Partial Business Use: If you use the office for both personal and business activities, only the business portion of VAT on expenses is reclaimable. This proportion should be based on reasonable calculations.
Flat Rate Scheme (FRS) Notes:
- For expenses over £2,000, you can reclaim VAT as long as labour and goods costs are itemised on the invoice.
- Invoices under £2,000 don’t require a business-use split.
Business Asset Disposal Relief (BADR)
When you dispose of business assets, such as a home office used by the business, you may qualify for Business Asset Disposal Relief (BADR). To be eligible, the office must have been in business use for at least two years before disposal. BADR can reduce your capital gains tax when you sell associated business assets like shares.
Principal Private Residence Relief (PPRR) Considerations
If your home office is attached to your main residence, it’s vital to consider potential PPRR issues. This is especially important for landlords, property investors and business owners with mixed-use property, where advice from property accountants can help avoid unexpected tax issues later. PPRR normally allows you to avoid capital gains tax when selling your primary residence. However, if any part of your home is used exclusively for business, that section could be subject to capital gains tax upon sale.
Practical Advice
Before you begin constructing a home office, consulting a tax advisor is essential. Our team can provide business tax advice before you commit to major costs. They can guide you on claiming the right deductions and avoiding issues like loss of PPRR. Making informed decisions now can save you tax headaches in the future.
Get In Touch
Planning a home office or garden office for your business? Get a quote from Yorkshire Accountancy and we’ll help you understand the tax position before you start.
