Tax implications of building an office for home working

Following the pandemic, flexible working hours are on the increase. This shift has given employees the legal right to request flexible working from the first day of their employment. However, there is no statutory right for employees to work from home, even though homeworking is already the norm for many self-employed.

Where existing space at home is not suitable for a room to be set aside as an office, many may look to build an extension, convert a loft, or build a garden room. Should the employer pay the cost, a benefit-in-kind charge may arise as the employee is deemed to gain a benefit from using a company asset.

For the self-employed, tax relief cannot be claimed on the cost of the structure itself nor for any other costs directly associated with the building and office installation, including delivery charges if a ready-made office is purchased. The cost of initial decoration also falls within this category. However, repairs, including redecoration costs, are allowed. The cost of heating and lighting is tax deductible, as is the water supply if metered separately from the home.

Capital allowances

Tax relief may be available for certain payments under the plant and machinery rules. HMRC has issued a definitive list of claimable items and the contractor must itemize their invoice accordingly to show items that can be claimed. Such items include the thermal insulation of the building, electrics, kitchen equipment and fittings, washbasins/sinks/sanitaryware, furniture and furnishings (e.g. curtains, desks, etc.), and fire alarm systems.

Remember that capital allowances can only be claimed if accounts are prepared using the traditional (accruals) accounting method; they cannot be claimed if the cash-based accounting method is used.

VAT

The VAT rules differ from those for income tax and corporation tax. VAT can be reclaimed not only on any running expenses relating to office use but also on the cost of building or purchasing a ready-made office, as well as for any decoration. The VAT relating to the business proportion can be reclaimed should the office be used partly for business and partly for private purposes – any apportionment must be on a just and reasonable basis.

Businesses on the flat rate scheme (FRS) can reclaim the VAT paid on invoices exceeding £2,000 only if that invoice shows the cost of goods purchased separately from the labor cost; no split is required for invoices under £2,000. In addition, there is no restriction on private use under the FRS.

Business asset disposal relief (BADR)

A claim under the BADR rules may be possible where BADR is claimable on the disposal of shares, and there is an associated disposal of assets used by the company. Such assets can include premises used by the business but personally owned by the director. The main requirement for relief in such circumstances is for the asset to have been used in the trade throughout the two years before the share disposal.

Practical point

Problems may arise should the office be attached to the main residence as areas of a private residence ‘used exclusively for a trade or business, or of a profession or vocation’ are denied principal private residence relief.

Partner note

The Flexible Working (Amendment) Regulations 2023 Nos 1328

s224 TCGA 1992

s169K TCGA 1992

HMRC Capital Gains Manual 63998

VAT Notice 733

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