With flexible working on the rise, many employees are now working from home. For the self-employed, homeworking has been a long-standing norm. But what happens if your current home setup isn’t suitable for an office, and you decide to build a new space like a loft conversion or a garden office? It’s essential to understand the tax implications before you dive in.
Here’s a breakdown of the tax rules for both employees and the self-employed when it comes to building a home office.
Tax Implications for Employees
If you’re an employee and your employer pays for the cost of building a home office, you could face a benefit-in-kind charge. That’s because HMRC considers it a personal benefit to use a company asset, like a new office space at home. So, while it might sound appealing for your employer to foot the bill, there could be tax consequences.
Tax Relief for the Self-Employed
For the self-employed, the rules are a bit different. Unfortunately, you can’t claim tax relief on the cost of the structure itself, whether it’s a loft conversion, garden room, or an extension. The same goes for any installation costs, like delivery charges for a pre-made office or initial decoration costs.
However, you can claim relief on repairs and redecoration, as well as running costs like heating, lighting, and water, provided they’re metered separately from your home.
Claiming Capital Allowances
The good news is, there may be some relief available under the plant and machinery rules. Certain items, such as thermal insulation, electrics, kitchen equipment, washbasins, and even furnishings like desks and curtains, can qualify for capital allowances.
But remember, you can only claim capital allowances if you’re using the traditional (accruals) accounting method. If you use cash-based accounting, you won’t be able to claim them.
VAT Considerations
The VAT rules offer more flexibility than the income tax and corporation tax rules. If you’re VAT-registered, you can reclaim VAT on running expenses related to office use, as well as on the cost of building or purchasing a pre-made office. Even decoration costs are eligible.
If your home office is used for both business and private purposes, you can reclaim VAT on the business portion, as long as the apportionment is just and reasonable.
For businesses on the flat rate scheme (FRS), you can reclaim VAT on invoices over £2,000, but only if the invoice separates the cost of goods from the labour. For invoices under £2,000, no split is needed, and private use isn’t restricted under FRS.
Business Asset Disposal Relief (BADR)
If you own the home office personally and later sell shares in your company, you might be able to claim Business Asset Disposal Relief (BADR) on the office, as long as it’s been used in the trade for at least two years before the sale. This could provide valuable tax relief on the disposal of the property.
Watch Out for Principal Private Residence Relief (PPR)
One potential pitfall to be aware of is Principal Private Residence Relief (PPR). If your home office is attached to your main residence and is used exclusively for business purposes, it could lose the benefit of PPR. This means that when you sell your home, you might have to pay capital gains tax on the part of your home that’s used solely for business.
Need Help Navigating Home Office Tax Rules?
Building a home office can be a great way to improve your working environment, but it’s essential to understand the tax implications. Whether you’re self-employed or an employee, getting the right advice can save you money and hassle down the line.
If you’re unsure about how the rules apply to you or you need help navigating the tax implications of building a home office, get in touch with Jon and the team at Jon Davies Accountants. We’ll make sure you’re making the most of the tax reliefs available to you.
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