Andrew Needham looks at VAT consequences of working from home.
If a business is run from home or has an office at home, it is entitled to claim back the VAT on any legitimate business expenses.
This means that if the business incurs extra costs in running the business from home, it can reclaim the VAT on those costs, as well as a proportion of the running costs of the house.
Example: Office at home
The business operates from home and the office takes up 20% of the floor space of the house. HMRC will allow it to reclaim 20% of the VAT on the utility bills such as gas and electricity.
The legislation states that the calculation of reclaimable VAT on mixed business and private use has to be fair and reasonable. Increased VAT recovery could be achieved by using different apportionments (e.g., floor area, number of rooms, time usage, etc.).
VAT on other additional costs
As well as day-to-day running costs, the business may pay for other legitimate business costs of running the business from home (e.g., decoration costs and furniture).
There's no problem claiming VAT back on the costs of making the office a comfortable place to work. This includes the cost of any office furniture, redecoration, carpets and even display items such as pictures on the wall. Obtain and retain VAT invoices to support any VAT claim, in case of a VAT inspection by HMRC.
Although a business can reclaim VAT on items bought to make the home office look good, avoid paintings etc. that might increase in value, as the business could end up out of pocket. This is because the business will have to pay VAT on the increased value when it stops using the asset in the business.
Some costs are more obviously business-related. If a business has a separate business phone or broadband line at home, it can reclaim 100% of the related VAT. But if there is only one connection for both private and business, the business will have to make a fair and reasonable estimate of the VAT that can be reclaimed.
To reclaim VAT on domestic costs, they must be paid for by the business. This is easy for a sole trader or partner, as HMRC accepts that you and the business are one and the same. But directors must make sure the bills are in the name of their company. They must also reimburse the company for private use to avoid tax and National Insurance contributions problems.
HMRC will accept claims made through the expenses system so a director can claim a fair proportion of them on their monthly expenses claim even if the bill is not in the company’s name.
Extensions and conversions
With more and more people now choosing to work from home, the question of what can be done with VAT on the conversion costs is becoming a common issue.
For example, a business may decide to build an extension or have a loft conversion to give sufficient office space to run the business. The office will contain the usual computers, desks, etc., and be decorated and furnished in line with the proposed use. In these circumstances, the VAT on these costs can be reclaimed. If the work is done through a limited company, get the invoices addressed to the business.
Practical tip
If a business is run from home, it can reclaim the VAT on the direct business costs and on a fair and reasonable proportion of joint business and private costs.
