Andrew Needham looks at the VAT implication of using your home to work from.
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If you run your business from home or have an office at home, you are entitled to claim back the VAT on any legitimate business expenses.
This means that if you incur extra costs in running your business from home, you can reclaim the VAT on those costs as well as a proportion of the running costs of the house.
Example: Office at home
If you work from home and your office takes up 20% of the floor space of your house, HMRC will allow you to reclaim 20% of the VAT on your utility bills, such as gas and electricity.
The law states that your calculation of VAT claimable on mixed business and private use costs must be fair and reasonable. So, consider different ways you could claim a higher proportion (e.g., floor area, number of rooms, time usage etc.).
VAT on other additional costs
As well as day-to-day running costs, your business may pay for other legitimate business costs of running your business from home, such as decoration costs and furniture.
There's no problem claiming VAT back on the costs of making your 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. As always, make sure you get a VAT invoice to support your claim in case you get a visit from HMRC.
Tips and traps
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Although you can reclaim VAT on items you buy to make your home office look good, avoid paintings etc. that might increase in value, as you could end up out of pocket. That's because you'll usually have to pay the VAT on the increased value when you stop using the asset in your business.
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Some costs are more obviously business related. If you have a separate business phone or broadband line at home, you can reclaim 100% of the related VAT. But if you have only one connection for both private and business, you'll have to make a fair and reasonable estimate of the VAT you can reclaim. For example, 90% of calls are private but are free; conversely, business calls are made at chargeable times and account for 50% of the bill. So, you can reclaim 50% of the VAT.
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You do not have to limit your claim to the household costs mentioned above. Perhaps you use a cleaning company which also spruces up your home office? Or do you store files etc. at home and incur VAT on security costs (e.g., alarms)? Put your thinking cap on and see what else you can reclaim.
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To reclaim VAT on domestic costs, they must be paid for by the business. This is easy if you're 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.
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HMRC will accept claims made through the expenses system, so if you are a director and the household bills are in your name, claim a fair proportion of them on your 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 the 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 it is through a limited company, get the invoices addressed to the business.
Practical tip
If you run your business from home, you can reclaim the VAT on the direct business costs and on a fair and reasonable proportion of joint business and private costs.
