Jennifer Adams considers the tax implications for a self-employed individual of building a purpose-built office at home.
Many of the self-employed already work from home, but the pandemic has brought such flexibility into potential reality for employees as well.
Where existing space does not allow a room to be set aside as an office, one may be created (e.g., by building an extension, converting a loft or building a garden room). Garden offices can range from as little as £1,000 for a DIY-style cabin with little or no insulation, to upwards of £30,000 for 'state of the art' buildings.
Construction
Whether the building is a DIY construction or a ready-made office, the expenditure on buildings, foundations, and structure is not tax-deductible as either an expense or capital allowance against profits. Design and other costs directly associated with building and installing the office, including delivery charges, count as the cost of the structure and therefore are not tax-deductible. The cost of initial decoration also falls within this category; repairs, including redecoration costs, are allowed.
However, capital allowances are available on plant and machinery. HMRC has a definitive list of claimable items, and the contractor must itemise their invoice accordingly to show items that can be claimed. Such items include:
- any thermal insulation of the building;
- any personal security required;
- integral features – electrical system (including lighting);
- space or water-heating systems;
- powered systems of ventilation, air cooling or air purification and any floor or ceiling comprised in such a system;
- external solar shading;
- kitchen equipment and fittings;
- washbasins/sinks/sanitary ware;
- furniture and furnishings (e.g. curtains, desks etc.);
- fixings (e.g. shelves and systems);
- sound insulation;
- computer, telecommunication and surveillance systems including their specific wiring;
- fire alarm systems and other equipment for extinguishing or containing fires; and
- burglar alarm systems.
The cost of heating and lighting the office is tax-deductible, as is the supply of water, if metered separately from the home.
VAT
The VAT rules differ from those for income tax and corporation tax. Not only can VAT be reclaimed on any running expenses, but also on the cost of building or of buying a ready-made office as well as any decoration.
However, if the office is used partly for business and partly for private purposes, only that part of the VAT relating to the business proportion can be reclaimed. Any apportionment must be done on a just and reasonable basis.
If the contract is for the 'supply and fit' of an office, the 'fitting' is a supply, and businesses on the flat rate scheme (FRS) will not be able to reclaim the VAT unless the invoice separates the cost of purchase from the cost of labour. This applies to invoices of £2,000 and over. In addition, under the FRS there is no restriction in private use.
Capital gains
If the office is DIY or 'ready-made', when the time comes to sell the main residence there should be no capital gains tax (CGT), as the value will probably be worth less than the cost of the structure.
Problems may arise should the office be part of the private residence, as TCGA 1992, s 224 states that areas of a private residence 'used exclusively for the purpose of a trade or business or of a profession or vocation', are denied principal private residence relief. The issue could be avoided by having a clear dual purpose for the room (e.g. place exercise equipment or activities for the whole family in the same room).
Practical tip
Mixed use will assist in the CGT problem, but if the employer purchases the office or pays for the conversion of an employee’s loft or garage, a benefit-in-kind charge may arise should the office be used for both private and business use, as the employee will be deemed to gain a benefit for use of a company asset.
