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Markel Tax

14 May 2020

VAT on a home office

Question: I have a client company that is building an office in the grounds of the owner/director’s private house. Is the company allowed to claim VAT on the building costs?

Answer: This can be a tricky one! In principal, the company can recover any VAT on costs it buys in, to the extent it is both the recipient of those services/goods and is using those purchases for the purposes of its VATable (taxable) business activities.

The first thing to be sure of is that it is the company that is contracting with the suppliers (and gets valid VAT invoices issued to it in its name), rather than the homeowner. The second point is the trickier part – working out whether the purchases made by the company might be available / used for private purposes and, therefore, a business / non-business apportionment made to the input tax recovery on a “fair & reasonable” basis.

HMRC manual has some useful commentary on this dilemma in VIT41600 (and more generally in VIT10200); this talks specifically about costs incurred in the course of operating a business from a sole trader’s or partner’s domestic premises. In theory, as the purchases are made by the company, a separate entity from the homeowner, it should be easier to justify full VAT recovery as there is a clearer distinction between the two, especially if the company capitalises the costs in its accounts. However, this is muddied by the homeowner and company being connected, and by the fact that a family could be reasonably expected to make use of such a structure in their garden for private purposes from time to time.

For fixture and fittings, office equipment, decoration type costs (i.e. short-economic life and less personal/domestic in nature), it should be relatively easy to demonstrate whether these are for business purposes or not. For the structure itself, this is more difficult as, unless it is easily portable, or the company has a legal right to occupy that structure as owner for the foreseeable future (ideally 10 years), then HMRC is likely to be sceptical about full VAT recovery.

If full VAT recovery is justified by the company, but the office is subsequently put to private use (including if the company exits the property leaving it in the homeowner’s garden), there could be a deemed supply and output tax due at that point in time on some of the costs (see VIT25600 for goods and VIT25700 for services put to private or non-business use), unless useful economic life of the relevant purchases has expired / fully depreciated.

 The sorts of questions HMRC is likely to consider in this scenario are:

- Is the office easily portable, or is it fixed to the ground in a permanent way, e.g. plumbed in, fixed to concreted in foundations or otherwise fixed in such a way that would require tools to remove it, would damage the structure or the land to remove it? If it is easily portable, this supports any argument that the office will be used wholly for business purposes as the business could take the office with it if it decided to work from a different location.

- Does this structure increase the value / marketability of the homeowner’s property?

- Is there a formal agreement in place between the homeowner and the company about use of the garden? For example, if the company leased the garden area from the homeowner and had explicit consent to use that.

- Is there anything that supports an argument that the company will get use of this office for at least the next 10 years? With property-related costs, VAT rules consider the useful economic life to be up to 10 years, so being able to show that the company will get the benefit of this expenditure for at least 10 years helps justify VAT recovery.

- What happens to the office if the homeowner decides to move home or dispose of its interest / cease its involvement in the company?

- Is the office of such a size or style that private use is likely?

- Does the homeowner have sufficiently large garden and / or another summer house type structure that would make use of the office for personal purposes less likely?

- Is planning permission required, and if so, who requested this – the company or the homeowner?

- How are utilities dealt with? Does the office have a separate meter? Who are the utility invoices addressed to?

- If customers come to the office, is there a separate access or would they have to walk through the house?

 In addition, there may be other tax implications, for example CGT, that need to be considered.

Here to help

With more than 75 highly skilled tax and funding specialists, advising on over 2,000 complex tax issues each year, we work with your practice to provide up to date, practical solutions. If you have a client in a similar situation, or have a tax question of your own, we're here to help on 0345 223 2727. Or to find out more about our services, email taxmarketinguk@markel.com.

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