What are the tax implications on garden offices and can garden offices be purchased through your limited company are questions that are frequently being asked now. It comes as no surprise as the boom in popularity of garden offices is likely to be due to the seismic shift of more and more people required to work from home.
Whether it’s a need for work/life balance and separation, a dedicated space to stay organised or meet with clients professionally, or simply somewhere to not be disturbed, garden offices are an attractive solution. However, there are multiple different tax considerations that should be made when it comes to putting the costs through your limited company.
Structures & Buildings Allowance
The Structure & Building Allowance is a relatively new allowance that was introduced in October 2018. It allows businesses to claim 3% on qualifying expenditure for the construction, renovation, conversion and repairs of buildings and structures. This can make it seem tempting to jump straight in and pay for materials and installation of a garden office through your limited company. However, this allowance strictly prohibits any tax relief on residential property, any other building or structure that functions as a dwelling, or the purchase of land.
As such, this means there is no tax relief available for the initial cost of materials or construction of the garden office. Similarly, there is no allowance to offset related costs such as planning request or application fees, legal fees or architecture or design fees. If you do decide to go ahead and purchase the garden office through your limited company, be aware that, because there are no allowances and it is not an allowable business expense, the cost of the office will not help reduce your corporation tax bill.
Plant and Machinery Allowance
Although there is no allowance that will help cover the initial cost of the garden office, the cost of instillation for utilities such as electrical wiring, plumbing or thermal insulations can be covered as a capital allowance. This means that the cost of these can be deducted from your company’s profits to reduce your corporation tax bill. The plant and machinery allowance does not apply to anything that is not outrightly owned by the company, so if you hire any equipment such as air-conditioning just over the summer months, this cannot be claimed for. Other capital allowances that can be claimed include furniture such as desk, office chair, shelving, floor lamp etc.
If your limited company is VAT registered, then it may still be advantageous to pay for the cost of the garden and build through the company despite not being able to offset any costs against your corporation tax bill. Some costs can be recovered through reclaiming on VAT. This option would not be available if you were to pay for the garden office personally.
For those who use the VAT flat rate scheme, be aware that you will need to ensure the cost of the materials and the cost of the construction are separate. Furthermore, the materials should be bought all together and charged as a single transaction that is at least £2,000. Under the flat rate scheme, only capital assets for individual purchases at a minimum of £2,000 can be reclaimed. This means VAT cannot be reclaimed for services, so be sure to avoid package deals where materials and installation are sold together.
Another note of consideration is that VAT cannot be reclaimed where there will be any significant personal use of the garden office. If there will be some minor personal usage, then you may only be able to claim back a portion of the VAT.
Allowable business expenses
Whilst not a tax implication when deciding how best to purchase a garden office, a business and accounting consideration to make is the ongoing running costs. The costs for electricity when it comes to lighting, broadband or running your computer, as well as heating costs for over the winter, are all allowable business expenses. Pay for these costs through your limited company to reduce your corporation tax bill.
Realistically, these charges are likely to be added on to your own personal consumption of utilities for your whole property. It is unlikely that you will open a separate energy account just for operating your business from the garden office. Therefore, you will need to calculate a fair percentage of the bills to allocate as business expenditure.
Where your garden office has been purchased through your limited company, you need to consider whether there will be any personal usage, even if it is as minor as reading your book in there or using it as storage. Any personal use will mean automatic restrictions to the allowances you’re able to use, as well as being limited to only reclaim a portion of the VAT. This is because business allowances only apply to qualifying expenditure which is wholly and exclusively for the purpose of the business.
Not only that, but where you purchase your garden office through your limited company and intend to use it personally, it is likely that you will incur personal income tax and both employer and employee National Insurance due to receiving a benefit-in-kind. HMRC have provided guidance on how this benefit would be calculated. Be aware that if you instead decide that no personal use will be allowed on the garden office, you may need to retain evidence of this. It is not uncommon for HMRC to assume there is personal use as it is in their interest to collect more taxes.
Although unlikely, it is possible that your local council may want to assess your garden office to determine whether its liable to pay business rates. You do not usually have to pay business rates for home-based businesses unless there is clear evidence that your home has commercial use such as a distinct and separate area for business.
If your local council does decide that business rates are applicable to your garden office, you should be able to alleviate the cost of this with small business rates relief. This is available for property with a rateable value of £15,000 or less. For property with a rateable value of £12,000 or less there will be no business rates to pay. For property with a rateable value between £12,001 and £15,000 there will be a gradual percentage reduction.
Capital Gains Tax (CGT)
CGT only needs to be considered when it comes to selling your home. In most instances, CGT does not apply when you sell your main residence. Therefore, if your garden office has had personal usage, no CGT will apply, even where it has been purchased through your limited company. Where your garden office was exclusively used for business only, then CGT will apply. Practically this is often difficult to substantiate (in the same way that HMRC will assume the garden office has had personal use and therefore attract BIK) which means CGT may not be an issue.
Whether or not CGT will apply will also be dependent on the type of garden office you have erected. If it is one which can be dismantled and taken away to your next property, then there will be no CGT. If it is a more permanent structure that will remain after the sale, a valuation on the garden office alone may be sufficient to show that it has not increased in value and therefore no gain has arisen. Should a valuation show the contrary, the gain may be covered by your CGT exemption.
Should your garden office attract business rates, regardless of whether it falls within the small busines rates relief threshold, CGT will apply. It also means that part of your property is formally considered a commercial property which could put off potential buyers. It is something you will need to consider when it comes to selling your property.
Alternatively, you may not want to purchase your garden office through your limited company. This may be due to the complexity in accounting, especially where you are completing your own company tax return or simply that you wish to keep the garden office as a personal asset. Despite this, there are still some of the associated costs of the garden office which you can recover through your company. The different options you have to do this are explained in our other article ‘Different ways to claim tax relief when working from home’.