Working from home is becoming more and more common, as many of us are looking for better work/life balance. Therefore garden office became quite an appealing option, as it allows a bit of space away from family life as well as a dedicated spot for meeting clients, if required, while you are still close to home. Hence the frequently asked question is whether you can pay for the garden office though your limited company or not. And as always there are few things to consider.
What will the garden office be used for?
First question to ask yourself is whether the garden office will be used solely for business or whether you also expect some private usage eg. a place to rest over the weekend, a guest room or a playroom. The answer will help us to assess the tax implications and the correct treatment of costs associated.
What are the tax implications on initial costs?
Garden offices can carry significant initial costs and the majority of those costs are not tax deductible expenses.
The Structures & Building Allowance of 3% on qualifying expenditure for the construction, renovation, conversion and repairs of building and structures, which applies to offices, however strictly prohibits any tax relief on residential property. This means that you can’t receive any tax relief for the initial cost of materials or construction of the garden office.
Furthermore, there is no allowance to offset the related costs such as planning or application fees, legal or architecture fees, design fees or initial decoration costs.
The good news is that we have plant and machinery allowance available. This allowance relates to the cost of installation for utilities such as electric wiring, light fittings, plumbing, heating, air-conditioning or thermal insulations. It applies only to anything that is outrightly owned by the company, so any hired equipment cannot be claimed.
Additionally, there is fixtures and fittings allowance. The capital allowances can be claimed on all fixtures and fittings of your garden office, which include desk, office chair, computer, shelving, lamps, surveillance system or burglar alarm system etc.
Can VAT be claimed on the costs?
Regardless of not being able to offset any costs against your corporation tax bill, the advantage of paying for garden office through the company is that you will be able to reclaim VAT, if your company is registered for VAT. This option is not available if you pay for the garden office using your personal funds. However, bear in mind, this is only possible if there isn’t any significant personal use of the garden office. If there will be some minor personal usage, then you may only be able to claim back a portion of VAT.
What can be claimed as allowable business expenses?
Once in use, the garden office will have associated running costs, that will count as allowable business expenses eg. the cost of light and heating, broadband. The costs of redecoration and repairs are also allowable business expenses.
What to consider if a garden office is used for business only?
If the garden office is used for business only, firstly you can reclaim VAT fully and not worry about any benefit in kind. However what you have to bear in mind is that business rates may be payable on your garden office. It is possible, that your local council may want to assess your garden office to determine whether it’s liable to pay business rates. Usually there are no business rates for home-based businesses unless there is clear evidence that your home has commercial use such as a district and separate area for business. Please contact your local council to determine whether you are required to pay any business rates.
Another tax to consider is Capital Gains Tax (CGT), but only applicable if you are selling your home. CGT does not apply when you sell your main residence. Therefore if your garden office was exclusively used for business only, CGT will apply, but only if it is a permanent structure that will remain after the sale. You will need a valuation on the garden office alone to determine if there is any increase in value and any gain has arisen. However if your garden office can be dismantled and taken away to your next property, then CGT does not apply.
What to consider if a garden office has personal use?
As mentioned before, if you use your garden office personally, then VAT may not be recoverable or must be reduced. Business rates and CGT are not applicable if there is an element of personal use. However we have to consider Benefit-in-kind (BIK). If the garden office was purchased by the company and you are using it personally, then BIK applies, which means that you will incur personal income tax and employer National Insurance due to receiving benefit from the company.
What happens if you close the limited company?
If you are thinking of closing the company, but still keeping the garden office, you will have to buy the garden office back from the company at the commercial value. If your company is registered for VAT this also needs to be accounted for in the sale.
There are different elements to consider when buying the garden office to determine what is the most viable option for you and your business. So whether you will personally or through the business, largely depends on what usage you are anticipating for your garden office as well as what are your plans for the future, like selling the house or closing the company. In any case if you would like to go though your situation to make sure you understand your options, please do not hesitate to contact us.