Building a Garden Office: Tax implications for the Company and the Director/Employee

There are several tax issues directors need to consider when building or purchasing a garden office through a limited company. In this blog, we will discuss the tax implications for those running a home office and understand how building a garden office can affect your tax position.

Tax implications

When the company pays for the garden office, it will need to consider the impact of the following taxes and allowances -

• Corporation Tax Relief:

  The company can pay for the full cost of the garden office, assuming it is used for business purposes. However, no corporation tax deduction can be claimed on the actual building cost as HMRC sees it as a capital expense rather than a revenue expense because the building is expected to be used for a reasonable period and will provide enduring benefit to the business. Therefore, it doesn’t qualify for immediate tax relief. Even though a garden office is a moveable item, it counts as a structure from which your business operates rather than an item of equipment.

  As a result, none of the costs of a DIY construction or a ready-made office’s purchase price is deductible from your business profits. This includes design and planning, as well as the actual construction and initial decoration. However, Running costs, including the cost of heating and lighting the office, is tax-deductible, water rates also allowable if the supply of water & it’s separately metered from your home. Repairs, including redecoration costs, are also tax-deductible.

• Capital Allowances:

  The main mechanism for businesses to get tax relief for the costs of acquiring assets likely to last a long time is via capital allowances. Assets that generally qualify as Plant and Machinery (P&M) are eligible for capital allowances. If the asset purchased qualifies for Annual Investment Allowance (AIA), it enables a business to claim 100% of the cost of the asset in the first year, subject to the annual limit. The issue here is that not all assets qualify for the AIA.

  Structures and buildings are one class of assets that do not qualify for capital allowances because they are not regarded as P&M but considered as a place or setting in which the business is conducted. So, it is not possible to get capital allowances for the office costs. Further, the costs for the garden office cannot be claimed under the newly announced Structures & Buildings Allowance (SBA) because the expenditure is on residential property, and structures that function as dwellings do not qualify for the relief. Even if an argument is made that the area will be used exclusively for commercial purposes, HMRC can easily challenge it on the grounds that you intended to use the property for residential purposes. Therefore, to use this allowance, you will need to buy or take on a lease that piece of land where the structure will be installed, creating Stamp Duty Land Tax (SDLT) and other legal issues.

  However, the good news is that fixtures and fittings do qualify for tax relief through capital allowances, which will allow you to claim for costs such as furniture, curtains, shelves, etc. The cost of installing power, including electrical wiring, light fittings and heating, also qualify. Thermal insulation qualifies too, despite being part of the initial construction.

• Value-added tax (VAT):

  Reclaiming VAT can make a significant difference in the building cost. VAT incurred on the cost of building structure or furniture or furnishing can be reclaimed if it is solely used for business purpose. VAT cannot be reclaimed if you are a director of a company and using the accommodation for personal use. However, if you use the room for both business and private use, only the business proportion of VAT can be reclaimed, and you must apportion it on a just and reasonable basis. However, if you use the VAT flat rate scheme, consulting a tax expert is highly recommended.

  No home-based employee can recover the VAT cost by building a home office where the employee incurs all the expenditure. Hence, VAT can only be recovered by a VAT registered business.

• Benefit-in-kind (BIK):

  BIK tax is payable when a company/employer pays for the director’s or employee’s personal expenses. For example – The company paying for employees’ loft or charges of the garage.

  If a company pays for the garden office and it was also used privately for other means or by other family members, this will attract a benefit in kind charge and could also result in restriction of other allowances for the business as the property needs to be used exclusively for business purposes.

• Business rates:

  You may be liable to pay business rates on that garden/office proportion you are using for business purpose. Business rates are payable when the valuation office agency give your home’s rateable value. Thus, it is recommended that you must contact the valuation office agency at the time of project planning to work out the business rate implications. However, council tax for part of the home office used for domestic purposes will remain payable.

• Capital gains tax (CGT):

  You are entitled to a full-time tax exemption called Principal Private Residence Relief (PPR) and don’t have to pay CGT on any gains made from the sale of your only or main residence. However, this relief may be restricted where part of your home is used exclusively for business purposes. This means that when the property is sold, you need to apportion the gain on a just and reasonable basis, and only the office portion will be liable to CGT. If you use your garden office for personal purposes, CGT will not apply but will trigger the BIK charge, as explained above.

  The type of garden office you build can also have an impact on the CGT you pay. If the office is a structure that can be uninstalled and moved to another location, then there will be no CGT issue. But if it is a permanently installed structure and will be sold along with the main residence, you could value it separately, and any increase in value will be subject to CGT. Your capital gains annual allowance will be available to offset against the gains made on the sale.

  Thus, while creating a home office, you must consider the impact it may have on the availability of PPR on any gains arising from the sale of your residence.

Other Issues

Additionally, you need to take into account other factors which could have an impact on your decision to build a garden office.

• Insurance -

  Building a garden office may impact your home insurance. Thus, it is recommended that you contact your insurance company and tell them about your plans before execution.

• Planning permission -

  You may require planning permission to run your business from your home. You may need to apply for a license depending on nature and business type. Thus, contacting the local authority for advice is a step you must take before going forward.

• Mortgage -

  Building a garden office and using part of your home for a business may affect your mortgage. You must inform your lender about your plans.

Building a garden office and paying for it through the limited company may sound tempting, but it comes with its complexity, and you need to seek proper advice before buying the structure. The alternative is to build the office by paying it personally and charging a rent to the company for the office’s use.

In case you need specialist advice on "Tax implications of building a garden office", kindly call us on 03330886686, or you can also e-mail us at info@dnsaccountants.co.uk

Also See: List Of Business Expenses You Can Claim As A Limited Company

This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction.

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.