What can your business claim and what happens to the VAT
A garden office can be a brilliant way to create a proper workspace at home. Unfortunately, the tax rules do not simply allow you to deduct the whole cost from your business profits.
The building itself, the equipment inside it and the VAT on the invoices can all be treated differently. The position also changes depending on whether you are a sole trader or operate through a limited company.
The short answer: The shell of a garden office will not normally qualify for capital allowances, even if it looks movable. However, some of the furniture, equipment and fitted systems may qualify. VAT may also be recoverable, but only where the usual VAT conditions are met and any private use is dealt with correctly.
Why the office building itself usually gets no tax relief
A new garden office is capital expenditure because it creates an asset that will last for several years. That means it is not treated in the same way as an ordinary running cost.
Capital allowances can give tax relief for qualifying plant and machinery. A building or structure normally does not qualify because it provides the setting in which the business is carried on rather than acting as business equipment itself.
There is a separate structures and buildings allowance, but buildings in residential use are excluded. A garden office within the grounds of your home will therefore not normally qualify.
Would a caravan or movable office work instead
Simply choosing a caravan, shepherd’s hut or wheeled office does not automatically solve the problem. HMRC looks at how the asset is actually used.
If it stays in one place, is connected to electricity or water, has paths or landscaping around it and is expected to remain there, it is likely to be treated as a structure. A portable unit that is regularly moved from one business site to another may qualify, but that is very different from a home office that happens to have wheels.
Costs that may qualify
Although the main structure is unlikely to qualify, it is still worth separating the quotation and invoices into clear parts. Tax relief may be available for items such as:
- desks, office chairs and shelving
- computers, screens, printers and other office equipment
- certain electrical, lighting, heating, ventilation and plumbing systems
- security equipment and other qualifying business fixtures
Many businesses can claim the full cost of qualifying plant and machinery through the Annual Investment Allowance, subject to the normal limits and conditions. The precise treatment depends on what has been installed, who owns it and how it is used.
What about repairs and running costs
Repairs and maintenance can usually be deducted where they simply keep the office in its existing condition. Replacing a broken pane or repairing damaged wiring is very different from building the office or significantly improving it.
Business running costs may also be claimed, but any private element must be removed. These might include electricity, heating, insurance and broadband. The correct method differs for sole traders and limited companies, so it is sensible to agree the approach with us rather than simply putting every household bill through the business.
Can the VAT be reclaimed
This is the part that often causes confusion. A cost can fail to qualify for capital allowances but still carry recoverable VAT. The two sets of rules are separate.
A VAT-registered business may be able to reclaim VAT where the cost is genuinely incurred for its taxable business activities. The contractor’s work on a normal garden office will usually be charged at the standard rate of VAT. Reclaiming that VAT is not automatic, however.
The VAT conditions to check
- The business must be VAT registered and make taxable supplies. Businesses making exempt supplies may have no recovery or only partial recovery.
- The business should be the customer receiving the supply and should hold a valid VAT invoice in its name.
- The cost must have a clear business purpose. Paying a personal invoice from the business bank account does not turn it into a business purchase.
- Any private or non-business use must be excluded using a fair and reasonable apportionment.
A special warning for limited companies
Extra care is needed if your company pays for a garden office that will be fixed to land owned personally by you or your spouse. The company may be paying to improve an asset that it does not own, while you receive a lasting personal benefit. HMRC may question whether the company was genuinely the recipient of the building work and whether all of the VAT relates to its business activities.
The contract, invoices, ownership arrangements, business use and what happens if you move home or close the company all matter. There may also be employment tax or benefit-in-kind issues if the company meets a personal liability or provides an asset with private use.
If the individual homeowner orders and pays for the work, the company cannot normally reclaim the VAT simply by reimbursing them. This is why the arrangements need to be considered before the order is signed and before deposits are paid.
What if the office is used privately as well
If the office doubles as a hobby room, spare room or family space, a VAT claim must reflect that private use. A sole trader would normally claim only the business proportion. A company also needs to consider the VAT and employment tax consequences of making an asset available privately to a director or employee.
Keep a sensible record of the intended use and how any percentage has been calculated. If the use changes later, the VAT treatment may need to be revisited. Very high-value land and building expenditure can also fall within the VAT Capital Goods Scheme, which tracks changes in use over several years.
Do not forget the other possible issues
Tax relief is only part of the picture. Before going ahead, consider:
- Capital Gains Tax when the home is sold. Exclusive business use of part of a home can restrict private residence relief for that part.
- Business rates, particularly if the office has been adapted for business use or clients and staff visit it.
- Planning permission, building regulations and any restrictions in your title deeds, lease or mortgage.
- Home and business insurance, including cover for equipment and visitors.
What to do before you buy
Ask the supplier for a detailed quotation that separates the building shell, installation work, electrical and heating systems, furniture and equipment. Then speak to us before signing the contract or paying a deposit.
We can help you decide who should enter into the contract, which costs may qualify for tax relief, how much VAT can safely be reclaimed and what records you should keep. It is much easier to put the right arrangement in place at the start than to repair it after the office has been built.
Thinking about a garden office
Please contact us before placing the order. We can review the proposed costs and explain the tax and VAT position for your business.