You’re thinking of giving up your rented office and converting your garage in to an office instead, so can you put the cost through my business?
Many business owners are looking at different options around working from home, and around 44% of UK workers are reportedly working from home, or hybrid working (source ONS.gov.uk).
Garden offices are quite popular, which we cover in our blog here, but the following blog covers the conversion of a garage or existing home space into a home office.
Let’s look at why you might want to put the costs through your business:
If you are sure it’s a good plan to convert your garage into an office, you’ll probably do it anyway.
So I think the question we need to ask is – can we put the cost through the business and save tax?
Is it a legitimate business expense?
For the business to pay for the cost, the new office needs to be wholly used for the business, so this is the first question to ask yourself.
If you’re actually converting it for use as an extra living space, and very rarely using it to work in, then you’re going to struggle to justify this to the tax man, so it won’t be a business expense.
Will it reduce my tax?
If it is a legitimate business expense, we then need to check whether any of the costs can reduce your tax:
It depends, is the quick answer. We have to look at the type of cost to see whether it’s “allowable” for tax relief.
Structural costs:
- These are costs like adding or knocking down walls
- These type of costs will not reduce your taxable profits, so won’t reduce your tax.
- The only time structural costs reduce your tax, is when you come to sell the asset. In this case we deduct the cost of the structural work from the sales proceeds.
- See below for guidance on capital gains tax.
Fixtures, fittings and equipment:
- This could include costs like office furniture and equipment, thermal insulation, electrical installation, power points
- These costs are treated as capital allowances and are deducted from your profits before calculating any tax.
- Therefore these are allowable for tax, and the business can pay for them.
Repairs and maintenance:
- Include costs such as painting, decorating, and general maintenance can be included in the business’ overheads.
- These costs will immediately reduce your taxable profits, and therefore reduce your business tax.
Private use of the office space:
- If you use the new office for any private use (this could be as small as storing your lawnmower) then you’re going to have to declare a benefit in kind to the tax office.
- This is because the company is paying for the new office, so you are getting a personal benefit as a director and employee.
- So don’t keep the lawnmower in the new office!
- We have a separate blog on benefits in kind and reporting on a P11D that goes into all the detail
What happens when I sell my home?
Usually when you sell your own home (your principal private residence) there are no tax implications whatsoever.
However, if the cost of the garage conversion is now in your company, when you sell your house, you’re also selling this business asset, so there may be tax to pay.
How do I work out any tax due?
- The first thing is to split the converted garage from the rest of the house. We would usually do this by floor area.
- Let’s say that the garage makes up 5% of the floor area of the whole house and garden.
- We would then take the sales proceeds of the house, and calculate 5% of this.
- So let’s say you’re selling your home for £500k. 5% of this is £25,000.
- £25,000 is now the sale proceeds for just the converted garage.
- We can deduct the structural costs from these proceeds, let’s say it cost you £5,000 to convert the garage.
- The business will then pay tax on the gain that’s left over of £20,000.
- The tax you’ll pay depends on your business structure. It could be between 19% and 25% if you’re a limited company, and between 18 and 28% if you’re a sole trader or partnership.
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What about VAT?
- If your business is VAT registered, and you receive proper VAT invoices in the business name for any of the costs above, we can claim the VAT back.
- However, if you’re using the flat rate VAT scheme, you can only claim VAT on assets (fixtures, fittings, equipment etc) if the VAT is over £2,000.
What if I’m converting the old garage to my office, and building a new garage?
Refer to the different types of costs above for converting the garage to an office, as the same rules will apply.
However, the cost of building a new garage at home would not have any business benefit, so there is no tax relief, and the cost shouldn’t be paid for by the business
What next?
- Head over to our blog on building a garden office at home.
- And do get in touch if we can help you to understand the rules.
