Claiming tax relief for a garden office

During the pandemic, millions of us were forced to work from home and many continue to embrace this change.

If you run your own company, you might have considered installing a garden office as a workspace – but have you thought about the tax implications?

Initial build costs

It is acceptable for the initial cost of the structure, and any other associated expenses, such as planning costs, architect fees and legal fees to be paid in full by your company.

However, these costs will not qualify for tax relief, as they will be treated as capital costs.

There are certain elements of the build which might however attract tax relief through the capital allowances regime, including:

  • installation and supply of power;
  • certain new fittings and fixtures etc;
  • installation of heating equipment;
  • thermal insulation;
  • air conditioning.

A detailed inventory should be kept of all parts of the build cost to support any claims for capital allowances.

What is the VAT treatment?

If the garden office is intended for 100% business use, the VAT charged on the capital costs may be recoverable in full by your company (assuming it is VAT registered).

However, if there is an intention for an element of private use, then a proportion of the VAT should not be reclaimed.

Similarly, once the office is functionable, ongoing costs such as light, heat, redecoration and repairs may be paid for by the business, and 100% of the VAT can be reclaimed, if the office is used solely for business purposes. However, if there is some private use, the amount of VAT that could be reclaimed would need to be restricted.

It is therefore important to remember that if the garden office has any personal use, for instance as a guest room for visitors or even a place to sit at the weekend to read a book, then tax relief will be restricted.

Although many people install a garden office for the sole use of working from home, it can be extremely difficult to prove to HMRC that you do not ever intend to use the building for any personal matters.

If you intend to use the office for business only, it would be prudent to have an agreement between the company and you prohibiting any private use.

Is there a benefit? – Income tax considerations

If the garden office is to have some personal, use, there would be an annual taxable benefit in kind, which would need to be reported on the employee/director’s P11D.

If the office is to be used wholly for business purposes, there should be no such benefit in kind.

Moving house – capital gains tax considerations

Often, when you sell your home, any capital gain is exempt from CGT due to the availability of “main residence relief.”

However, where part of the house has been used solely for business purposes, such as a garden office, a proportion of the gain might then become subject to CGT as main residence relief would be restricted.

If there is some private use of the office, then main residence relief might then be due in full (although there are various conditions that need to be met for that relief to be available).

Clearly if there has been private use, this will affect the VAT and income tax treatment as detailed above.

Other considerations – business rates

Business rates may be assessed on the building if there is 100% business use – this should be checked with your relevant local authority.

If your local council decides that your garden office is subject to business rates, you may be able to reduce the cost by obtaining small company rates relief which can be used by properties with a rateable value of £15,000 or less. If the rateable value is £12,000 or less, there will be no business taxes to pay.

If there is some personal use, then business rates will not be applicable.

Get in touch

Building a garden office for business purposes, and paying for it through a limited company, may sound tempting, but it comes with its complexities.

If you would like to discuss the tax implications of installing a garden office, please get in touch with Wendy Anderson by clicking the button below.

Important update regarding working from home allowances

Employees should be checking their tax coding notices and employers should be reviewing practises relating to “tax free” working from home payments with immediate effect

HMRC have recently issued confirmatory guidance that, with effect from 6 April 2022, the relaxed tax reliefs for employees who worked from home during the coronavirus pandemic will no longer be available.

Tax relief was available to those employees who worked from home due to the lockdowns imposed as a result of the pandemic, irrespective of how many days were actually worked from home. These relaxed reliefs were available for the entire tax years 2020/21 and 2021/22.

Relief was typically given via a deduction in individual PAYE tax coding notices, or by employers making tax free payments to employees of up to £6 per week, £26 per month or £312 per year.

As a result of the changes confirmed by HMRC, flexible working arrangements where employees choose or employers enable homeworking will now no longer qualify for the relief, unless there is a requirement for the employees to work from home or the situation is such that the employee cannot work from the business premises.

Two immediate actions arise as a result of the change in the position:

  • Employees should be reviewing their PAYE tax codes to ensure that they do not include a deduction for the working from home allowance, unless they are actually due the relief.

It has become apparent that a number of tax codes issued by HMRC to employees for 2022/23 continue to include such deductions.

Unless an employee is required to work from home for the purposes of undertaking their job, the working from home relief will no longer be available and those employees should request that their tax codes are adjusted to remove this relief.

If the codes are not amended, further tax will be due following the end of the tax year or at such a point following an amendment to their tax codes.

  • Employers should be reviewing their practises if they have been making “gross” payments to employees via the payroll in relation to working from home allowances.

Under the relaxed rules, payments of up to £26 per month could be made tax free.

These payments should now cease unless the employees are entitled to them as a result of them being required to work at home.

If you wish to discuss any of the above, please get in touch using the button below.