Can I reclaim VAT on the cost of my home office conversion?
If you're spending more and more time on your business at home then you might be wondering whether your business can pay for the cost of an office conversion and any related costs. And if you do decide to go ahead with the conversion, will you (or your company) be able to recover any VAT charged on these costs?
Well, that depends on whether you trade as a sole trader or limited company so we'll look at each of them below.
As a sole trader, the prospect of you claiming the VAT on the cost of your home conversion are going to be difficult because you and the business are one and the same person.
So what about claiming VAT on other costs?
Well, if you're a sole trader the rules on recovering VAT on household costs are reasonably straight-forward. For example if your home has 10 rooms and you use one of the designated bedrooms as an office you can claim 1/10 of the VAT suffered on gas/electricity etc for your house (although we don't usually recommend you use a room 100% of the time for business as you could get caught by Capital Gains Tax - you can see more about this here). However there is no 'one size fits all' case and you would need to review the specific circumstances carefully - it may be that any potential capital gain is covered by the annual exemption.
If you have a separate designated business phone line, you can claim back all of the VAT incurred. However if you use your phone line for both business and personal, you can only claim back a fair percentage based on your business usage.
You can also claim back the VAT on any necessary decorations and furniture.
What's the position if you trade as a limited company?
The situation is slightly different so we'll set out an example below to illustrate this point.
Harold is director of The Machine Ltd and has been spending more and more time working at home on his latest project. He is considering converting his loft into an office. The new office will contain computers, desks, chairs etc and will be decorated in line with its proposed use. The full cost of the building work, decorations and equipment will amount to £60,000 plus VAT which the company will pay because it can all be used for business purposes. The VAT on the work and equipment will amount to £12,000.
Can Harold's company recover the VAT charged?
Normally you'd expect Harold's company to recover the VAT on the equipment as this will be owned by Harold's company and is for business use.
However the cost of the building work and decorations is a different matter. HMRC suggests that the VAT work on the building work and decorations can't be recovered because it would be blocked by the VAT legislation.
However, HMRC's internal guidance (you can read more about this here - specifically section 12.2) also indicates that where accommodation is used partly for business purposes, they may agree an apportionment using an objective test based on the extent the room is used for business use.
Therefore if Harold can prove to HMRC that he intends to use the loft conversion for entirely business purposes The Machine Ltd may be able to recover the VAT on the building work plus the materials. If Harold can also demonstrate that the carpets and decorations are for a business purpose he may also be able to recover the VAT on these costs as well.
So what's the best way to approach this?
We'd recommend notifying HMRC in advance and giving them all the necessary information to allow them to agree that the building work is only being carried out for a business purpose and that there's no private use. Include the architect's plans and a list of furnishings you intend to use. Be sensible though, don't employ an interior designer and hang expensive works of art on the wall!
You could also apply the same principle to extensions, garage conversions, even the shed at the bottom of your garden. Provided there is a genuine business use and the furnishings are in line with the proposed use, you should be able to recover all of the VAT on any costs.
Just as with sole traders, we don't usually recommend you use a room 100% of the time for business as you could get caught by Capital Gains Tax - you can see more about this here. However there is no 'one size fits all' case and you would need to review the specific circumstances carefully - it may be that any potential capital gain is covered by the annual exemption.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].