Can my business pay for my garden office or workspace?

Garden Offices and workspaces have grown in popularity since the Covid Pandemic forced many people to work from home. Many businesses have chosen to relocate from commercial rented spaces and for some the ability to set up from home has given them the opportunity to consider starting their dream business.

For small and medium owner managed companies, especially those offering service-based businesses, a purpose-built garden office or workspace could be the solution.  But there are tax implications of building your own purpose-built garden space at home.

What is a garden office?

Unlike a converted garage, a spare bedroom office or the dining room table, a garden office or workspace is a viable professional alternative to traditional office space. It is a stand-alone structure on your land but not connected to your house,

Although some garden offices and workspaces are still converted sheds, more and more are being built with normal office amenities such as plumbing, hearing and insulation making them ideal to separate home and work life with a designated business space.

Initial Cost – Tax Relief

Your business can pay, in full, for the initial costs of construction of your home office or workspace along with the associated costs such as planning permission, architect and legal fees. This applies if you are self-employed or operating through a Limited company.

Whilst your business can pay for the construction and associated costs, not all costs are tax deductible.

This is because expenditure on buildings, structures and land are classified as Capital Expenditure, not revenue costs. Capital expenditure can qualify for capital allowances to obtain tax relief, but they are not available on land, buildings, or structures.

Capital allowances are available on plant and machinery and tax legislation provides a comprehensive list of items that satisfy this definition.

What you can claim for is the plant within the structure or building and this is where it is important to ensure that you have your invoice itemised correctly prior to the work being completed.

Items that are likely to be within the building and qualify as plant and machinery are:

• Any thermal insulation of the building
• Any personal security required.
• Integral features – electrical system (including lighting)
• A space or water heating system, a powered system of ventilation, air cooling or air purification and any floor or ceiling comprised in such a system.
• External solar shading
• Kitchen equipment and fittings
• Washbasins/sinks/sanitary ware
• Furniture and furnishings
• Sound insulation
• Computer, telecommunication, and surveillance systems including their specific wiring.
• Fire alarm systems and other equipment for extinguishing or containing fires.
• Burglar alarm systems

This list is not exhaustive so if there is anything you are unsure of, please seek further advice.

It is important to ensure that your invoice itemises all such items.  It would be normal to get a draft invoice from a supplier and for a review to be undertaken prior to commencing with the project to ensure items of plant can be separately identified and their cost quantified.

One important thing to remember – if your Limited company pays for the garden office and you close it down, you will need to purchase the garden office from your company and if you are VAT registered the sale will need to be reflected as a sale in your company records.

VAT

VAT charged on any costs incurred in planning and building the garden office or workspace, can be reclaimed if you are VAT registered and the garden office or workspace is intended to be used 100% for business use. If there is an intention for it to have a personal element as well, then the private proportion of VAT should not be reclaimed.

The same principles apply to claiming VAT back on the ongoing costs of your garden office.

Financing you garden office or workspace

If you require finance to fund the building of your garden office or workspace, then there are some tax considerations in relation to that funding.

The repayment of the capital element of a loan is never deductible for income tax relief purposes. However, interest paid on loans to a business will be a deductible revenue expense, provided that the loan was made ‘wholly and exclusively’ for business purposes. For example, interest paid on a loan taken out to acquire plant and machinery (a capital asset) is a revenue expense and will therefore be allowable for income tax or corporation tax.

The incidental costs of obtaining loan finance are deductible.

Given that business owners often borrow funds personally, and then introduce the capital to the business by way of a loan, it is essential that tax relief is not only secured at the outset of the loan but also maintained throughout the borrowing period. It is often the case that qualifying loans become non-qualifying loans, so care is needed.

Broadly, the loan will become non-qualifying if either the capital ceases to be used for a qualifying purpose or is deemed to be repaid.

Restrictions under the cash basis

Tax relief on loan interest is restricted where the ‘cash basis’ is used by a business to calculate taxable profits. Broadly, businesses using the cash basis are taxed based on the cash that passes through their books, rather than being asked to undertake complex and time-consuming accruals calculations.

Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500.

If a business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated.

Businesses should review annual business interest costs – if it is anticipated that these costs will be more than £500, it may be more appropriate for the business to opt out of the cash basis and obtain tax relief for all the business-related financing costs.

 Private use of assets

Where a loan is used to buy an asset that is partly used for business and partly for private purposes, only the business proportion of the interest is generally tax-deductible

 On going costs

Ongoing costs of the garden room can be paid for by the business and are tax deductible in proportion to business use.

So, if you use your garden office or workspace 100% of the time for business then it is possible to claim your running costs such as light, heat as well as any repair and redecoration costs. Any personal use of the space, such as a games room for the kids or a guest bedroom and a % adjustment must be made to the amounts claimed.

What if you move?

Your main or only residential property is entitled to principal private residence relief (PPR relief), which means you have no capital gains tax (CGT) to pay when you sell the property (if you have occupied it as your main or only home throughout ownership).

However, this relief may be restricted if part of your home is used for business only.  If no part is ever claimed for business, then the whole property continues to qualify for PPR.

If the garden office can be uninstalled or moved to another location, there may not be a CGT issue if it doesn’t impact the capital value of the whole property when sold. But if it’s been built as a permanent fixture, the increased value because of the garden office or workspace could be exposed to CGT (only if a business claim for the structure has been made).

The capital gains may be covered by the capital gains annual exemption amount, but the annual exemption amount was reduced to £6,000 from 2023/24 and will be further reduced to £3,000 from 2024/25.

Other considerations…

Home insurance: A garden office or workspace may affect your home insurance; you may need to contact your broker before any work starts.

Business rates: For a residential property, you’re liable to pay council tax. However, for a business property, you may be liable to pay business rates if the structure/space has 100% business use. It’s advisable to contact the valuation office agency before the garden office or workspace is built.

Planning permission: You’ll need to contact the local council to see if you’re allowed to build the garden office or workspace.

If you are looking to build a workspace at home and need more advice, our team are here to help. Contact us on Letschat@bean-sprout.co.uk