Use of home as office: What are the issues?

Lee Sharpe explores some potential tax risks in relation to working from home. 

Many more people have been working (more) from home, as shops and other businesses have been forced to shut their normal premises. In some cases, this might involve no more than a laptop and a ban on Radio 2 or Netflix during working hours. In other cases, a bedroom or similar will find itself being given over to predominantly business use. 

This article will look at some of the tax issues to beware of when making a claim for the business cost of using part of one’s home as one’s office, for people in business on their own account (i.e. the self-employed, partners and landlords). 

Income tax deductions 

Many readers will be familiar with making a claim for the business use of one’s home as an office; the legitimacy of a such a claim found favour in Caillebotte v Quinn [1975] 50 TC 222 (amongst other cases). Many readers will also be well aware of the following rates promulgated by HMRC: 

See ITTOIA 2005, ss 94B–94H; and HMRC’s Business Income manual at BIM75010 

The figures in the legislation are actually meant to cover only running costs, and not the fixed costs of holding and maintaining a property. There will in many cases be strong justification for significantly higher claims than £6 per week. But with such claims comes the need to justify the higher amounts. 

Income tax claims and private use 

In this regard, it is eminently sensible to acknowledge that, for many, a disallowance to reflect private use of a room otherwise used for business purposes will be only fair and reasonable (and perhaps even prudent, as we shall see).  

It is possible to argue that a room historically used for domestic purposes could be wholly given over to a trade. For example: 

• Front rooms in a private residence taken over as waiting and/or consulting rooms in a GP practice or similar; 
• A garage used exclusively to store goods for re-sale in a mail order business. 

In such cases, it could be argued that any residual private use is negligible. More generally, however, a disallowance to reflect intermittent or modest residual private use would be reasonable, and reflect the facts on the ground.  

Capital gains tax: Only or main residence relief 

One of the key concerns for using one’s home as an office is that it could later trigger a restriction in what might otherwise be 100% capital gains tax (CGT) relief under the ‘only or main residence relief’ provisions (or ‘principal private residence’ (PPR) relief), when the home is eventually sold, or some other disposal event triggers a possible charge to CGT.  

In the writer’s experience, such restriction is rarely encountered in practice. HMRC’s reluctance is likely down to the nugatory yield that would usually result. If someone owns their main residence for 15 years and uses even 20% of their entire home exclusively for business purposes for three years around the pandemic, only 4% of the gain is at risk.  

HMRC’s position is set out in its Capital Gains manual at CG64663, which states: 

“The exclusive use test [i.e. in the context of PPR/CGT] is a stringent one and you should not usually seek any restriction to relief for a room which has some measure of regular residential use. But occasional and very minor residential use should be disregarded. For example, if a doctor keeps private possessions in a room used as his or her surgery[,] the surgery should still be regarded as exclusively in business use.” 

In other words, a room (or rooms) would have to be pretty much dedicated to exclusive business use, for CGT to be a concern. But it is possible, and substantial historic claims under income tax will be a key indicator, e.g. for: 

• GPs running surgeries from home (and similar medical practitioners); 
• Barristers and similar who maintain substantial libraries/offices from home; 
• Architects who convert a room to a dedicated drawing room (not to be confused with a ‘withdrawing room’, in which one might carry on carousing after a hearty repast!); and 

• Artists who might need dedicated space to create, to show off and maybe even to sell their works. 

Such cases are relatively unusual. And, as medical practitioners tend now to cluster around larger and more specialised practice premises, and other professionals require less paraphernalia (or little more than a laptop and a plethora of digital licences), it may be that the distinction becomes even less common.  

However, as we shall see, there remains a potential risk for some workers, and potentially even professionals who (for example) host meetings with clients at their own homes. 

Business rates 

Business rates do not normally figure in the work of general tax practitioners. Once again, the  vast majority of claims for ‘use of home’ are highly unlikely to raise an eyebrow at the (presumably home) office of the local assessor or valuations officer (or even cross their desk in the first place). But it is possible that the use of one’s home could trigger a liability to business rates, where the property is not being used wholly for the purposes of living accommodation.  

Broadly, it could be said that the position is similar to that for CGT and PPR, as above; those cases that might be caught are likely to be obvious, because they are so unusual. Typical indicia are: 

• Adaptations to the property so as to lose its domestic character (e.g., structural works); 
• Significant use at the property of equipment not normally used in a domestic setting; 
• People employed at the property to work in the business; 

• Clients or customers visiting the property for business purposes. 

This is based on the case Tully v Jorgensen [2003] RA 22 2001, and it is memorable because it is a case in which the Inland Revenue lost…to the Inland Revenue! More fulsomely, the Inland Revenue (as was) wanted to apply business rates to the bedroom-now-home-office of an Inland Revenue employee, who had to work from home for an extended period, due to injury. 

That Inland Revenue employee was successful in convincing the Lands Tribunal (LT) that the home office should not be subject to business rates, because nothing had been done to the property (or any part of it) for it to have lost its essentially domestic character. The LT found: 

“…a person, in working at home, could [nevertheless] be using his house for the purposes of living accommodation. Residential property in which an occupier works avoids being [business] rated not simply where the use for the purposes of work can be regarded as de minimis but also where such use is properly to be viewed as use for the purposes of living accommodation… 

[T]he internet and e-mail have enabled increasing numbers of people to work at home where previously they would have had to go every day to an office elsewhere. Where a person working at home uses accommodation, furniture and equipment of the kinds that are commonly to be found in domestic property, such use will in general, in my judgment, constitute use for the purposes of living accommodation...The question will always be one of fact and degree.” 

But there are limits: in Fotheringham v Wood [1995] RA 315, an accountant ran his business from home, involving the largely permanent use of several rooms for offices, filing and storage; this, together with the facts that he publicly advertised his address in business listings, both employed staff and regularly held client meetings at the property, meant that business rates were due.  

Conclusion 

It seems reasonable to summarise that most taxpayers in business on their own account will be able to claim relief for the business element of use of home as office without fear of restricting CGT relief on their home or incurring business rates. While it may go against the grain, it would generally be prudent to acknowledge the continuing private use of such offices, in most cases.