Is the Cost of Building a Home Office Tax Deductible?
Updated: Sep 11, 2020
As home working looks to be here to stay, more and more people are asking about the tax implications of building a home office. Much like a lot of answers when it comes to tax, the answer is not straight forward.
Let’s assume you are working through a limited company and you are considering either building a home office by either extending or building a garden office, or converting a garage or other room into a permanent office. There is a complicated area and there is a lot to consider so we recommend getting in touch with an accountant before acting. The course of action you take can have implications on corporation tax, income tax, BIK, VAT and CGT.
First of all, it is our opinion that you are not able to deduct the cost of building new office space from corporation tax. Businesses were not, in fact, able to claim any capital allowances on building works until HMRC introduced Structures and Buildings Allowances in 2018. The SBA however currently prohibits claiming for home offices.
In the world of tax, there is a difference between renovations and improvements. Repairs are tax-deductible whereas improvements are not so bear this in mind when you are planning works.
Also, there is tax relief for the cost of fixtures, fittings and furniture. There is also relief for thermal insulation. For the avoidance of doubt, a shed will be deemed a structure and not allowable.
Income Tax / BIK
I have explained the impact of paying for renovation or capital works through your limited company on corporation tax. The next question Is how it impacts you own personal tax liability. If you are deemed to benefit from the works done, there may be benefit in kind implications which would result in a liability to income tax. The benefit could be from use of the office or alternatively it could come from an increase in value of the property of your own.
A principal residence is exempt from capital gains tax. This should apply to your home office as long as there is no part of the house is used exclusively for business purposes. If you convert part of your house into a dedicated home office, you might have issues here when it comes to selling your house.
As you can see there is a bit of trap herein that one rule requires forbids you personally benefitting whereas another rule forbids exclusive business use of the space so please get in touch with us if you would like us to look at the specifics of your case.
If your limited company is VAT registered, then you can benefit from being able to recoup the VAT on the costs of any building work carried out. Please note that if there is personal use of the office you will not be able to reclaim the entire amount of VAT paid. We can assist you coming up with a percentage of VAT that can be reclaimed.
It is also worth mentioning that if you use flat rate expenses then the treatment will vary depending on the cost and nature of the work carried out.
If you have decided to build a home office on your property, it is also worth contacting your council first to find out about any planning implications. It is especially worth doing this if you plan to have employees on site before your neighbours complain. If you change the nature of the property, you may incur business rates in the future.
Using your home for business purposes is a tricky area when it comes to tax given the mix of personal and business usage and private ownership versus company usage. We recommend that workers who are claiming home office expenses through a limited company draw up a contract between themselves and the limited company to allow them to claim a deduction on the cost of a home office. These contracts aim to balance your situation with what is allowable by HRMC.
Get in touch if you would like to discuss your personal situation and we can see how you can minimise your tax liability with any works you are thinking of doing.