Posted November 2, 2020

Garden Office – What are the tax implications??

Whilst the majority of office staff spent the last six months working at kitchen tables, dining rooms and bedrooms there has been a boom in the garden office market for those intending to make the switch to home working more permanently.  The recent announcement by the government that office workers are likely to be at home for at least the next six months will only increase the demand for home offices.

So, as a business owner, what are the potential tax consequences if the business or company purchases the home office and is this even possible?

In this blog, I will consider the tax effects for companies purchasing a complete prefabricated garden office pod for a director to work in from home.  The rules for partnerships, LLPs and sole traders are different, and also the rules relating to the construction of an office.

VAT Consequences of Buying a Home Office

home officeThere are two essential VAT rules we need to consider with the prefabricated home office:

  • Input VAT can only be reclaimed were the goods or services are used for a business purpose.
  • Where VAT is incurred “wholly or partly for other purposes then it can only be input tax to the extent that it is incurred for business purposes”.

When purchasing the garden office pod, the supply must be made to the business, and be for the purpose of that business.

In the case of the director of a limited company we would recommend that the company orders and pays for the home office, rather than the director claiming it as an expense or via an adjustment to the director’s loan account.

The second and third options do not necessarily restrict the VAT recovery, but the first option is easier to demonstrate as a company cost.

Where the expenditure is incurred within the confines of a private residence of the director the question of business purpose can be more difficult to prove.

If there is expected to be private use, however minimal, then an appropriate apportionment should be made.

If you are on the VAT flat rate scheme it is more complicated. You cannot reclaim VAT on purchases for the garden office, unless you spend over £2,000 on one single purchase of capital expenditure. As the building will contain expenditure from both goods and services, the building itself is a good, whilst the installation will be a service, you will need to request separate invoices from the supplier.

Corporation Tax Consequences for the Company

A company claims capital allowances on assets that it intends to keep and use in its business, these include, equipment, machinery and vehicles.

There are also capital allowances that can be reclaimed on structures and buildings, there is however a restriction on claiming capital allowances where the structure is a residence or the structure is located in the grounds of a residence.

Unfortunately this means that the cost of the garden office, including the planning, building and installation fees, would not be tax deductible for the company.

Capital allowances would be claimable on furniture or equipment installed into the building such as desks and shelving units and also thermal insulation, certain electrical wiring and plumbing costs.

The running costs of the building, eg electric, gas, repairs and water can be claimed as business expenses.

Personal Tax Consequences of a Garden Office

Benefit in Kind

If the garden office is used for any personal reasons eg you have a sofa bed for guests, somewhere for to relax on a weekend or just catch-up on personal life administration then there would be a benefit in kind charge on the employee.

It is very difficult to prove to HMRC that there is no personal use of a home office in your garden and you should therefore factor in any potential benefit in kind costs to your calculations when deciding whether to buy the office through the business.

The benefit in kind charges would be calculated as follows:

As the garden office is an asset that is made available to the employee for personal use it would be taxed on the higher of:

  • The assets annual value *
  • The rental or hire charges that you pay for it

Plus any cost you have paid for the asset during the year eg running costs

* the annual value is 20% of the market value when you initially provided it as an employee benefit.

So if the garden office cost the company £10,000 to install then the annual value and taxable amount would be £2,000 per year.

The employee would pay income tax on this amount and the employer would pay National Insurance – the amount would need to be declared in a P11D which needs to be submitted by 6 July following the end of the tax year.

What about Capital Gains Tax on a Home Office?

The current tax legislation provides an exemption for your principal private residence (usually the house you live in) from having to pay capital gains tax, this is providing there is no exclusive business use in your property, including outbuildings.

If your garden office is exclusively used for business, so you don’t pay any benefit in kind tax on it, you would have to pay capital gains tax on it when you sell your home.

The amount of tax you would need to pay depends on the percentage of the land your home office occupies. If the office occupies 5% of your land, you would have to pay tax on 5% on the gain when the property is sold.

Remember you may have an annual exemption to use against the gain.

As with most things to do with tax, there are advantages and disadvantages of the company paying for a director’s home office, and the company paying for a home office with no private use can have tax repercussions in the future in relation to capital gains tax.

I hope that this blog has cleared up some of the queries you may have had in relation to the tax consequences of a garden office.  This blog, is however intended to be a general overview and not specific advice, if you are looking at buying an office through your company and would like to receive tailored advice, please click here to speak to one of our advisors.